The   Machinery 

"f 
Wall  Street 

WHY  IT  EXISTS,  HOW  IT  WORKS  AND 
WHAT  IT  ACCOMPLISHES 


BY  G.  C.  SELDEN 


Author  of 


"Psychology  of  the  Stock  Market,"  "A.  B.  C.  of  Bond 
Buying,"  "Investing  for  Profit,"  etc. 


THE  MAGAZINE  of  WALL  STREET 

42  BROADWAY 

NEW  YORK 


COPYRIGHT,  1917 

MAGAZINE  OF  WALL  STREET 
Latest  Revised  Edition,  1919 


A  f\  FT  A  r~^ 


CONTENTS 

I     Why  Do  We  Need  a  Wall  Street     ...       7 
II     The     Banks  — Bank     Statement  —  Clearing 

House    Sub-Treasury 20 

III  The  Money  and  Credit  Markets   ....     33 

IV  Foreign    and    Domestic    Exchange — Balance 

of  Trade 44 

V    The    Corporation   as    an    Element   in    Wall 

Street 55 

VI     The  Bond  Market 68 

VII     How  Business   Is   Done  on  the   Stock  Ex- 
change    79 

VIII     How  Business  Is   Done  on  the  Stock  Ex- 
change   (Continued) 90 

IX     Inside  the  Broker's  Office 103 

X    Broker  and  Customers — The  Unlisted  Mar- 
ket     114 

XI     The  Curb  Market— Private  Bankers  .     .     .126 
XII     The  Promoter — Underwriting  Syndicates     .   137 

XIII  Distribution  of  News  and  Quotations     .      .   149 

XIV  Theory  of  Speculation — Speculative  Terms  .   161 


CHAPTER  I 
Why  Do  We  Need  a  Wall  Street? 

TO    most    people    the    machinery    of    Wall 
Street    seems    intricate    and    mysterious. 
There  is  probably  no  part  of  the  business 
activities  of  the  country  that  is  so  much  misun- 
derstood. 

The  popular  idea  of  Wall  Street,  picked  up 
from  miscellaneous  sources,  such  as  news- 
paper headlines,  cartoons,  magazine  stories 
and  moving  pictures,  seems  to  embrace  a 
hodge-podge  of  corpulent,  side-whiskered 
bankers  surrounded  by  champagne  bottles, 
haggard  speculators  bending  feverishly  over 
stock  tickers,  habitually  risking  their  last  dol- 
lar and  generally  losing  it,  Mephisto-like  ma- 
nipulators always  determined  to  ruin  each 
other  or  be  ruined  in  the  attempt,  and  child- 
like young  gamblers  whose  touching  confi- 
dence in  human  nature  leads  them  to  risk  their 
widowed  mothers'  patrimonies  in  a  single 
throw  on  any  "tip"  which  may  be  offered  them. 
To  the  man  who  is  earning  his  livelihood  day 
7 


8 


THE  MACHINERY 


by  day  in  the  clock-like,  well-ordered,  efficient 
business  life  of  the  Street,  these  popular  ideas 
seem  so  absurd  that  he  thinks  they  must  be 
mythical.  It  is  only  when  he  leaves  his  habit- 
ual haunts  and  mingles  with  the  people  on  the 
farms,  in  the  stores  and  in  the  factories  that 
he  awakes  with  a  start  to  the  monumental  ig-, 
norance  of  the  public  in  general  about  the 
things  that  seem  to  him  nothing  but  daily 
business  routine. 

But  while  the  details  of  the  machinery  of 
Wall  Street  are  complicated,  just  as  are  the  de- 
tails of  the  steel  industry  or  boot  and  shoe 
manufacturing  or  any  other  specialized  depart- 
ment of  modern  life,  its  main  features  and  pur- 
poses are  comparatively  simple  and  very  inter- 
esting. 

Why  a  Wall  Street? 

Why  do  we  need  a  Wall  Street?  For  it 
must  be  that  we  do  need  it  or  we  should  not 
have  it.  Nothing  could  call  it  into  existence 
except  a  demand  of  some  sort  for  the  services 
rendered. 

To  start  at  the  beginning,  it  is,  as  all  the 


OF  WALL  STREET  ^ 

economists  tell  us,  division  of  labor  that  per- 
mits and  to  a  great  extent  causes  the  advance 
of  civilization.  So  long  as  each  individual 
grows  for  himself  or  makes  for  himself  every- 
thing that  he  needs,  he  is  a  slow  and  clumsy 
producer.  He  has  to  do  everything  on  suchj 
a  small  scale  that  he  can  make  use  of  no  ma- 
chinery and  only  of  the  simplest  tools.  He  has 
little  chance  to  rise  above  the  standard  of  liv- 
ing of  a  savage. 

With  the  division  of  labor  comes  a  great  gain 
in  production,  and  the  gain  is  constantly  in- 
creasing through  the  use  of  more  and  better 
machinery,  which  only  the  division  of  labor 
permits. 

But  division  of  labor  means  that  each  man, 
or  each  group  of  men,  makes  a  different  prod- 
uct— hence  these  various  products  must  in 
some  way  be  exchanged  before  they  can  be  put 
to  use  where  they  are  needed.  At  first  the  man 
who  has  too  many  potatoes  exchanges  some 
of  them  with  his  neighbor,  who  has  too  much 
corn,  and  so'  on.  But  this  is  a  slow  and 
awkward  process,  and  the  next  step  is  for  all 
the  people  who  have  any  exchanging  to  do 
to  meet  together  at  some  agreed  place,  and  do 


10  THE  MACHINERY 

it  all  at  once — in  other  words,  a  market  is  es- 
tablished. 

So  long  as  transportation  is  slow  and  crude, 
each  community  has  to  have  its  own  little 
market;  but  the  larger  the  market  the  more 
conveniently  the  process  of  exchanging  can 
be  carried  on,  and  now  that  railroads,  mails, 
telegraph  and  telephone  bind  whole  nations 
together,  it  is  possible  to  have  sectional,  na- 
tional or  even  world  markets. 

There  is  another  thing  besides  transporta- 
tion that  permits  the  exchanging  process  to  be 
centralized  for  a  large  area,  and  that  is  the 
intricate  network  of  credit  that  binds  the 
modern  community  together.  The  Dakota 
farmer,  for  example,  can,  by  establishing 
a  credit  at  Chicago,  sell  his  wheat  there  by 
telegraph — to  be  delivered  at  some  future  date 
— and  at  the  same  time  the  New  York  or 
Liverpool  merchant  can  btfy  at  Chicago  in  the 
same  way. 

And  as  the  use  of  credit  develops,  the  credit 
itself  comes  to  be  something  to  be  bought  and 
sold  for  a  certain  rate  of  interest,  so  that  a 
central  market  for  credit  is  also  needed — the 
money  market,  in  current  phraseology. 


OF  WALL  STREET  11 

Next,  large-scale  production  requires  the 
corporation — because  one  man  would  not  ordi- 
narily have  money  enough  to  finance  large- 
scale  production,  so  that  it  is  necessary  for 
many  persons  to  club  together  and  put  up  the 
money.  Each  member  of  such  a  club  gets  a 
certificate  showing  his  share — as  the  English 
logically  say — in  the  ownership  of  the  corpora- 
tion, and  these  shares  or  stocks  have  to  be 
bought,  sold  and  exchanged  somewhere  in  a 
central  market.  \ 

Thus  in  a  perfectly  natural  and  obvious  way, 
to  meet  the  necessities  o£  the  modern  industrial 
organization,  the  money  market  an<f  )the  stock 
exchange  arise — or  in  common  parlance,  Wall 
Street. 

Wall  Street  As  a  Money  Market 

In  the  Wall  Street  district  we  find  the  cen- 
tral exchange  or  market  for  money,  capital, 
securities,  several  important  commodities,  and 
foreign  exchange.  All  these  things  may  be 
and  constantly  are  exchanged  elsewhere  also, 
but  Wall  Street  affords  the  principal  market 
for  them  in  this  country. 

The  term  "money  market"  is  used  to  cover 


V 


12  THE  MACHINERY 

not  only  the  exchange  of  actual  cash,  in  gold, 
silver  or  currency,  but  alsd*bank  checks  (which 
are  merely  substitutes  for  money,  made  pos- 
sible by  established  credit)  and  short  term 
loans,  which  involve  the  payment  of  money  at 
an  early  date.-^  Thus  call  loans — the  payment 
of  which  may  be  demanded  at  any  time — or 
loans  for  three  or  six  months  and  occasion- 
ally one  year,  are  included  in  the  money 
market.  ^3  -  $ft~ 

If  these  short  term  loans  arise  out  of  com- 
mercial transactions  they  appear  in  the  form 
of  notes  given  by  those  engaged  in  various 
lines  cf  business  and  are  called  commercial 
paper.  If  the.  loans  are  based  on  mortgages, 
bonds  or  stocks  as  security,  they  are  called  col- 
lateral loans. 

Capital,  on  the  other  hand,  as  used  in  Wall 
Street  phraseology,  refers  to  funds  which  are 
invested  in  a  more  permanent  way;  that  is,  in 
some  productive  enterprise,  whether  through 
the  medium  of  securities  issued  by  a  corpora- 
tion, or  directly,  as  in  the  case  of  a  partner- 
ship or  individual  business. 

It  will  be  seen  that  the  distinction  between 
"money" — in  the  sense  of  bank  deposits,  com- 


OF  WALL  STREET  13 

mercial  paper,  or  short  term  loans — and  capi- 
tal, is  not  very  sharply  drawn.  We  deposit 
our  "money"  in  the  bank;  the  bank  loans  it 
to  somebody  else  as  "money";  but  a  surplus 
of  unloaned  deposits  in  the  banks  represents 
a  sort  of  potential  capital,  because  a  part  of 
such  a  surplus  is  pretty  sure  to  be  invested  in 
business  enterprises  of  various  kinds.  Hence 
an  accumulation  of  bank  deposits  is  often  re- 
ferred to  as  "liquid  capital,"  because  it  is  capi- 
tal in  a  preliminary  form,  ready  to  flow  into 
any  business  enterprise  that  its  owner  may 
select. 

Wall  Street  carries  on  the  process  of  ex- 
changing securities  in  a  variety  of  ways,  to 
suit  the  convenience  of  the  people  who  have 
the  work  to  do.  If  a  stock  or  bond  is  being 
constantly  bought  and  sold  in  considerable 
quantities  it  is  more  convenient  for  the  brokers 
who  do  the  work  to  get  together  around  a  post 
on  the  floor  of  the  Stock  Exchange.  If  for  any 
reason  the  Exchange  has  not  admitted  a  cer- 
tain security  to  its  list,  but  there  is  neverthe- 
less a  good  deal  of  trading  in  it,  the  brokers 
who  handle  it  gather  in  the  street  outside, 
forming  the  Curb  market. 


14  THE  MACHINERY 


.. 


Still  other  securities  are  bought  and  sold 
only  occasionally.  These  are  generally  classi- 
fied as  "unlisted."  Certain  brokers  specialize 
in  one  or  more  of  these  inactive  securities,  be- 
ing always  ready  to  buy  at  one  price  or  to  sell 
at  a  somewhat  higher  price.  Other  brokers 
know  who  the  specialists  in  different  securi- 
ties are,  so  that  the  market  for  a  security 
is  more  or  less  centralized  around  the  spec- 
ialist. 

In  this  way  there  arises  an  "unlisted  mar- 
ket," in  which  brokers  get  together  by  tele- 
phone or  telegraph,  instead  of  gathering  in  the 
Stock  Exchange  or  on  the  Curb. 

Symbols  of  Capital 

All  these  stocks,  bonds  and  mortgages  repre- 
sent capital.  They  are  not  capital  in  them- 
selves because  the  capital  they  represent  has 
long  ago  been  paid  in  and  has  gone  its  way  into 
the  business  of  the  company  which  issued  the 
securities,  where  it  can  be  found  in  the  form 
of  factories,  warehouses,  land,  materials,  steel 
rails,  cars  and  locomotives,  bank  deposits  of 
the  company  to  be  drawn  upon  as  needed, 
or  what  not.  The  stocks  and  bonds  are 


OF  WALL  STREET  15 

merely  certificates  of  ownership  or  of  capital 
loaned. 

New  capital  is,  of  course,  constantly  piling 
up,  as  a  result  of  the  profits  and  savings  of  the 
people,  and  as  constantly  flowing  out  into  new 
business  enterprises  or  the  enlargement  of  oM 
ones,  generally  through  the  medium  of  securi- 
ties of  some  sort. 

Even  among  well-informed  persons,  few 
have  any  adequate  idea  of  the  rapidity  with 
which  new  capital  accumulates  in  this  coun- 
try. In  1916  our  wealth  is  growing  at  the  rate 
of  at  least  eight  per  cent,  yearly,  probably  nine 
per  cent.,  possibly  ten  per  cent. — or  say  $20,- 
000,000,000  a  year. 

A  part  of  this  increase  represents  the  growth 
in  the  appraised  value  of  land,  which  is  a 
monopoly  value,  because  the  land  is  but  little 
more  productive  than  it  was  last  year;  but 
probably  $12,000,000,000  a  year  is  produced 
wealth  which  actually  goes  toward  making  the 
people  richer.  A  large  part  of  this  wealth  is 
spent  for  immediate  use  and  enjoyment,  but 
even  after  that  has  been  deducted  there  re- 
mains a  tremendous  surplus  which  is  carried 
forward  as  new  capital  every  year.  For  the 


16  THE  MACHINERY 

distribution  of  this  capital  into  business  enter- 
prise Wall  Street  is  the  important  central 
agency. 

Investment  of   Savings 

In  this  way  Wall  Street  affords  the  princi- 
pal opportunity  for  the  profitable  investment 
of  savings.  Savings  of  a  business  man  are 
more  likely  to  be  called  profits,  and  the  savings 
of  a  corporation  are  known  as  surplus,  but  the 
three  amount  to  the  same  thing. 

Savings  are  sometimes  invested  directly  in 
securities,  but  more  often  indirectly.  The 
wage-earner  puts  his  money  in  the  savings 
bank  and  the  bank  buys  bonds  with  it.  The 
business  man  allows  his  profits,  perhaps,  to 
accumulate  in  his  checking  account  at  his  local 
bank,  but  that  bank  will  make  profitable  use  of 
them  in  some  way — and  to  earn  a  profit  they 
must  be  invested  somewhere.  The  corpora- 
tion's surplus  may  go  into  a  New  York  trust 
company,  wrhich  perhaps  loans  them  to  a 
broker  on  collateral  security,  while  the  broker 
irr  turn  lends  the  money  to  a  customer  who 
uses  it  as  part  payment  for  stocks.  So  in  one 
way  or  another  a  very  large  part  of  the  coun- 


OF  WALL  STREET  17 

try's  savings  pass  through  Wall  Street  on  their 
way  into  productive  enterprises. 

Since  commodities,  such  as  wheat,  hay  or 
cotton,  are  not  as  easily  transported  as  securi- 
ties or  credit,  Wall  Street,  situated  at  one  end 
of  a  country  3,000  miles  wide,  naturally  does 
not  hold  the  same  dominating  position  in  the 
commodity  markets  as  it  does  in  security 
markets.  There  are  three  important  com- 
modity exchanges  in  New  York  City,  dealing 
in  cotton,  coffee  and  grain.  The  Produce  Ex- 
change is  only  one  of  a  dozen  or  so  of  various 
sizes  in  different  parts  of  the  country — the 
largest  of  which  is,  of  course,  the  Chicago 
Board  of  Trade.  The  Cotton  Exchange  shares 
business  in  that  staple  with  New  Orleans. 

These  exchanges  deal  in  their  respective 
commodities  for  future  delivery  as  well  as  on 
a  cash  basis.  If  cotton  could  not  be  bought 
or  sold  on  the  exchange  unless  the  cotton  was' 
actually  on  hand  to  be  deliveed  at  once,  the 
usefulness  of  the  exchange  would  be  nearly 
nullified.  Now,  any  one  who  has  or  expects 
to  have  cotton  in  any  part  of  the  world  can 
buy  or  sell  it  at  New  York  for  delivery  as  far 
ahead  as  may  be  necessary.  That  brings 


18  THE  MACHINERY 

buyers  and  sellers  on  different  continents  al- 
most as  near  together  as  though  they  were  in 
the  same  room. 

Foreign  Exchange 

The  necessity  for  a  central  market  in  foreign 
exchange  arises  from  our  foreign  trade.  If  A 
>has  sold  $10,000  worth  of  cotton  to  England 
while  B  has  bought  $10,000  worth  of  pocket- 
knives,  there  is  obviously  no  sense  in  A's  send- 
ing; $10,000  in  gold  across  the  ocean  only  to 
have  it  sent  back  again  to  B.  Stripped  of  all 
technicalities,  the  foreign  exchange  market 
simply  enables  B  to  pay  the  $10,000  to  A,  thus 
closing  up  both  transactions.  This  could  only 
be  done  through  some  sort  of  central  market, 
as  otherwise  A  and  B  would  never  get  in  touch 
with  each  other. 

The  principal  reason  why  we  need  a  Wall 
Street,  then,  is  to  bring  together  buyers  and 
sellers,  borrowers  and  lenders,  from  all  over 
the  world.  Capital  flows  through  Wall  Street 
into  varied  industries  just  as  the  heart  dis- 
tributes the  blood  to  the  different  parts  of  the 
body.  It  is  like  the  big  central  exchange  of  a 
telephone  system.  From  it  the  wires  run  to  all 


OF  WALL  STREET  19 

the  people  who  want  to  do  business  in  the 
things  with  which  Wall  Street  deals.  The  man 
who  has  a  few  shares  of  stock  to  sell  or  a  few 
thousand  dollars  to  loan  is  indirectly  put  in 
touch  with  the  whole  world  for  a  market. 

It  is  a  splendid  piece  of  machinery,  probably 
the  most  valuable  to  the  country  of  any 
mechanism  or  organization  the  mind  of  man 
has  devised.  It  will  be  well  worth  our  while 
to  examine  its  parts  more  in  detail. 


The  Banks— Bank  Statement— Clearing 
House — Sub-Treasury 

THE  modern  bank  grew  up  out  of  the 
ancient  business  of  money-changing,  or 
__  exchanging  the  money  of  one  country 
for  that  of  another.  That  business  was  always 
unpopular  because  the  money-changer  did  not 
appear  to  be  doing  any  real  work  for  the  profits 
he  made  out  of  the  exchange,  and  because  the 
money-changers  often  drove  unfair  bargains 
with  those  who  were  at  their  mercy. 

The  Middle  Ages  did  not  recognize  the 
legitimacy  of  interest  on  borrowed  money.  It 
was  looked  upon  as  extortion,  the  economic 
function  of  capital  being  altogether  too  abstract 
a  conception  for  the  people  to  assimilate —  and 
that  is  still  true  of  many  untrained  minds  in 
every  country. 

Most  of  the  diatribes  against  the  "Money 
Power,"  the  "sharks  of  Wall  Street,"  and  so 
on,  are  really  the  off-spring  of  this  ancient 
prejudice.  It  is,  perhaps,  an  evidence  of  the 
natural  selfishness  of  mankind  that  the  money- 

20 


OF  WALL  STREET  21 

lender  has  always  been  hated  by  the  borrower, 
with  or  without  cause;  but  the  advent  of  the 
corporation  has  done  much  to  remove  this 
prejudice  by  taking  the  personal  element  out  of 
business. 

The  first  bank  worthy  of  the  name  is  sup- 
posed to  have  been  established  in  Venice  in 
1157.  The  word  bank  signified  a  "pile"  or 
"mass"  of  funds.  The  early  Italian  banks  were 
chiefly  for  the  handling  of  government  obliga- 
tions. The  next  step  was  for  the  bank  to 
undertake  the  care  of  money  for  individuals 
and  firms,  and  at  a  later  date  for  corpora- 
tions. Money  so  deposited  is  always  subject 
to  the  order  of  the  depositor,  either  on  demand 
or  at  a  certain  date,  or  after  a  specified  notice. 

Interest  may  or  may  not  be  paid  on  these 
deposits,  according  to  the  agreement;  but  to 
pay  the  cost  of  handling  the  money,  and  the 
interest,  if  any,  the  bank  is  allowed  to  lend 
the  deposits  out  at  interest,  always  keeping  in 
hand  a  certain  amount  of  cash  to  meet  the  cur- 
rent demands  of  depositors.  In  this  way  we 
arrive  at  the  main  items  of  the  modern 
"bank  statement" — deposits,  loans  and  re- 
serves. 


22  THE  MACHINERY 

Trust  Companies  are  chartered  under  State 
laws,  and  are  authorized  to  do  a  general  bank- 
ing business,  but  cannot  issue  currency,  that 
power  being  reserved  for  banks  having  the 
National  charter.  Trust  Companies  may  also 
undertake  almost  any  kind  of  trust  as  their 
name  indicates,  and  engage  in  nearly  every 
kind  of  legitimate  business.  They  are  of  re- 
cent development.  The  first  one  was  estab- 
lished in  New  York  in  1822,  and  as  late  as  1871 
there  were  none  in  Boston. 

Trust  Companies  at  first  confined  themselves 
to  handling  funds  left  in  trust,  but  as  they  were 
not  so  closely  restricted  by  law  as  the  banks 
they  gradually  found  themselves  able  to  pay  a 
higher  rate  of  interest  on  deposits,  and  hence 
did  more  and  more  a  general  banking  business. 
In  New  York  they  are  now  almost  equal  to  the 
banks  in  importance. 

The  Bank  Statement 

All  banks — except  private  bankers — issue 
public  statements  of  their  condition  from  time 
to  time.  The  U.  S.  Comptroller  of  the  Currency 
calls  for  such  statements  from  all  National 
Banks  about  once  in  two  months.  The  exact 


OF  WALL  STREET  23 

date  is  not  fixed  until  after  it  is  past,  to  prevent 
the  banks  from  making  special  preparations  for 
the  statement. 

The  banks  of  several  of  the  big  Eastern  cities 
issue  statements  weekly,  for  the  convenience 
of  the  public.  Far  the  most  important  of  these 
weekly  statements  is  that  of  the  banks  and 
trust  companies  which  are  included  in  the  New 
York  Clearing  House.  It  is  given  out  on  Satur- 
day, and  is  printed  or  summarized  in  the  lead- 
ing newspapers  throughout  the  country. 

Although  at  first  glance  the  Bank  Statement 
appears  rather  formidable,  its  main  features  are 
simple  enough.  Each  institution  gives  its 
capital;  its  net  profits;  the  total  of  its  loans, 
discounts  and  investments;  the  amounts  of 
various  kinds  of  money  it  has  on  hand;  the 
amount  of  cash  it  has  on  deposit  in  other  bank- 
ing institutions  which,  under  the  law,  may  be 
counted  as  a  part  of  its  reserves ;  its  own  "net 
deposits" — that  is,  the  total  of  the  funds  that 
have  been  placed  in  its  care;  and,  in  the  case 
of  a  National  Bank,  its  outstanding  "circula- 
tion," or  the  total  of  the  currency  which  it  has 
itself  issued. 


24  THE  MACHINERY 

The  figures  given  out  for  each  of  the  above 
items  represent  the  average  for  all  the  days  of 
the  week  covered  by  the  statement.  The  aver- 
age is  used  to  prevent  any  temptation  to  "win- 
dow-dressing," or  trying  to  make  an  especially 
good  showing  for  the  particular  day  of  the 
report. 

The  several  items  are  then  totaled  in  three 
groups — banks  which  are  members  of  the  Fed- 
eral Reserve  system ;  State  Banks  not  members 
of  Federal  Reserve ;  and  Trust  Companies  not 
members  of  Federal  Reserve.  Finally,  the  three 
groups  are  combined  to  give  the  total  of  each 
item  for  the  entire  Clearing  House. 

A  supplementary  statement  is  also  issued 
showing  the  totals  for  each  of  the  three  groups 
on  the  day  the  statement  is  issued.  This  Is 
called  the  "Actual  Condition,"  and  is  in  most 
general  use  for  judging  money  conditions, 
since  it  gives  the  latest  available  information. 

As  the  provisions  of  the  new  Federal  Re- 
serve law  in  regard  to  reserves  are  somewhat 
complicated,  a  special  statement  is  added  show- 
ing the  "Reserve  Position/'  both  average  andl 
actual. 

With  such  complete  weekly  statements  of 


OF  WALL  STREET  25 

the  condition  of  each  bank,  manipulation  of  the 
accounts  becomes  impossible,  and  the  state- 
ment of  the  New  York  Clearing  House  is  per- 
haps the  most  important  weekly  financial 
showing  in  the  world.  Its  only  possible  rival 
would  be  the  statement  of  the  Bank  of  Eng- 
land, and  since  that  does  not  cover  other  Lon- 
don banking  institutions  it  is  necessarily  less 
comprehensive.  Certainly  no  other  table  of 
figures  will  show  the  trained  observer  so  much 
about  financial  and  economic  conditions  in  the 
United  States. 

Surplus  Reserves 

The  figures  most  closely  watched  by  Wall 
Street  are  the  Surplus  Reserve  and  the  rela- 
tion between  "Net  Demand  Deposits"  and 
"Loans,  Discounts,  Investments,  etc."  The  re- 
serve consists  of  two  parts — cash  in  vault,  and 
reserve  in  the  hand  of  other  depositaries  as 
permitted  by  the  law — and  this  total  reserve 
must  equal  or  exceed  a  specified  percentage 
of  each  bank's  own  deposits.  If  for  any  tem- 
porary reason  a  bank's  reserve  falls  below  this 
percentage  of  deposits,  the  reserve  must  be 
restored  to  the  legal  requirement  at  the  earliest 


26  THE  MACHINERY 

possible  moment,  and  State  and  Government 
officials  will  see  that  this  is  done. 

When,  on  the  other  hand,  the  reserve  ex- 
ceeds the  legal  requirement,  as  it  nearly  always 
does,  a  "surplus"  reserve  arises,  anti  the 
amount  of  this  surplus  shows  the  relative 
strength  of  the  bank's  cash  position.  Hence 
this  item  is  carefully  watched  as  an  index  to 
the  supply  of  money  available  for  loans.  Since 
a  great  many  securities  are  always  being  car- 
ried by  their  owners  partly  on  money  bor- 
rowed from  the  banks,  the  amount  of  this  sur- 
plus reserve  has  a  more  or  less  direct  rela- 
tion to  the  stock  market. 

The  relation  between  deposits  and  loans  is 
not  so  generally  understood  as  the  surplus 
reserve.  These  show  not  so  much  the  condi- 
tion of  the  banks  as  the  condition  of  the  busi- 
ness men  who  are  their  patrons.  When  the 
banks'  customers  are  depositing  more  money 
than  they  are  borrowing,  they  are  manifestly 
prospering.  When  they  are  borrowing  more 
than  they  are  depositing  it  is  evident  that  they 
are  not  so  prosperous,  and  when  this  condition 
continues  for  a  long  time  a  danger  point  may 
be  reached  where  some  business  men  have 


OF  WALL  STREET  27 

difficulty  in  meeting  their  loans  and  may  even 
have  to  fail. 

Under  normal  conditions  the  total  loans  of 
Clearing  House  institutions  may  be  some- 
what greater  than  deposits,  because  a  bank 
may  lend  not  only  the  money  that  other 
people  deposit  in  it  but  also  its  own  money — 
that  is,  its  capital  and  its  surplus  of  net  profits. 
Hence  if  deposits  exceed  loans,  a  strong  posi- 
tion is  shown;  but  when  the  loans  begin  to 
show  a  large  excess  over  deposits  the  situation 
will  bear  watching.  j 

It  must  be  noted,  however,  that  loans  made 
on  Government  bonds  or  Treasury  certificates 
as  security  are  considerably  different  from 
loans  made  on  ordinary  business  men's  notes, 
arising  out  of  general  trade.  These  Govern- 
ment securities  are  so  nearly  equivalent  to 
money  that  loans  made  on  them  have  a  much 
higher  standing  than  loans  on  commercial 
paper.  And  when  an  excess  of  loans  over  de- 
posits consists  entirely  or  almost  entirely  of 
these  loans  on  Government  paper,  it  does  not 
necessarily  indicate  any  special  weakness  in  the 
business  situation. 


28  THE  MACHINERY 

The  Clearing  House 

The  "clearing"  of  numerous  transactions  be- 
tween two  or  more  persons  by  offsetting  one 
debt  against  another  and  so  simplifying  the 
payments  to  be  made,  is  a  custom  so  old  that 
its  beginnings  can  hardly  be  traced.  In  Ro- 
man law  it  was  called  compensatio.  The  prin- 
ciple was  used  throughout  the  Middle  Ages 
and  it  is  rather  surprising  that  the  New  York 
Bank  Clearing  House  was  not  organized  until 
1853. 

It  is  a  slow  process  for  each  bank  to  collect 
checks  from  all  the  other  banks  separately, 
involving  a  great  waste  and  duplication  of  time 
and  labor.  This  is  avoided  by  establishing — to 
quote  from  the  Pennsylvania  Supreme  Court — 
"a  place  where  all  the  representatives  of  the 
banks  in  a  given  city  meet,  and  under  the 
supervision  of  a  competent  committee  or  of- 
ficer selected  by  the  associated  banks,  settle 
their  accounts  with  each  other  and  make  or  re- 
ceive payment  for  balances  and  so  'clear'  the 
transactions  for  the  day  for  which  the  settle- 
ment is  made." 

Every  bank  is,  in  essence,  a  merchant  of 
credit,  constantly  buying  credit  from  its  de- 


OF  WALL  STREET  29 

positors  and  selling  credit  to  its  borrowers ; 
and  credit  which  is  vouched  for  by  established 
banking  institutions  is  practically  a  uniform 
commodity.  Since  Wall  Street  is  a  sort  of 
central  market  for  this  credit,  serving  the 
whole  country,  there  are  a  vast  number  of 
credit  transactions  which  may  be  offset 
against  each  other  without  cash  payments. 
New  York  City  bank  clearings  for  19f5  were 
$110,563,374,000,  which  was  59  per  cent,  of  the 
total  for  the  whole  United  States.  Moreover, 
the  ten  largest  New  York  banking  institutions 
clear  more  checks  than  all  the  rest  of  the  Clear- 
ing House  combined,  so  that  the  handling  of 
the  country's  credit  is  pretty  well  centralized. 

Whether  or  not  there  are  dangers  arising 
from  this  extreme  centralization,  it  is  exceed- 
ingly convenient  and  efficient.  Each  institu- 
tion sends  two  clerks  to  the  Clearing  House 
every  day,  one  to  present  checks  to  other  banks 
and  one  to  receive  checks  from  them.  The 
process  usually  takes  only  a  few  minutes.' 
Seven  of  the  biggest  institutions  clear  their 
mutual  exchanges  by  themselves  an  hour 
earlier,  in  order  to  accelerate  the  final  clearing. 

Payments  amount  to  about  four  per  cent,  of 


30  THE  MACHINERY 

the  total  clearings,  as  a  rule.  They  are  some- 
times made  in  cash  and  sometimes  in  Clearing 
House  certificates  representing  deposits  of 
cash  by  member  banks  in  the  Clearing  House 
vaults. 

The  Clearing  House  also  serves  the  pur- 
pose of  bringing  all  the  banks  together  into 
a  central  organization  for  other  objects  besides 
the  sirnple  process  of  clearing  checks.  Banks 
which  are  entirely  solvent,  but  have  become  in- 
volved in  temporary  difficulties,  are  often  as- 
sisted by  the  Clearing  House  and  thus  saved 
from  suspension ;  and,  in  times  of  panic,  Clear- 
ing House  loan  certificates  have  several  times 
been  issued  to  take  the  place  of  money.  In 
1907  this  practice  spread  all  over  the  country, 
and  was  undoubtedly  the  means  of  preventing 
a  general  crash.  In  future  the  notes  issued 
by  the  Federal  Reserve  banks  will  obviate 
the  necessity  of  Clearing  House  loan  certifi- 
cates. 

The  Sub-Treasury 

Of  the  nine  Sub-Treasuries  which  act  as 
branches  of  the  Treasury  Department  at 
Washington  in  receiving  money  and  paying 


OF  WALL  STREET  31 

Government  bills,  the  one  in  the  Wall  Street 
district  handles  about  two-thirds  of  the  total 
business. 

The  relations  of  the  Sub-Treasury  with  the 
banks  are  necessarily  close.  The  assistant 
treasurer,  who  has  charge  of  it,  is  a  member 
of  the  Clearing  House,  and  in  times  of  stress 
he  is  in  frequent  consultation  with  leading 
bankers  and  co-operates  with  them  in  handling 
the  situation. 

The  Sub-Treasuries  were  established  in  1846 
because  the  Government  had  lost  considerable 
money  through  the  failure  of  depositary  banks 
in  which  it  had  been  kept.  From  then  until 
the  establishment  of  the  National  Bank  system 
in  1864  the  Government  kept  entirely  free  from 
the  banks,  and  even  after  that  most  of  the 
Government's  balances  were  held  at  the  vari- 
ous Sub-Treasuries. 

In  times  of  prosperity  the  Government  re- 
ceipts were  naturally  large  and  consequently 
the  Sub-Treasury  withdrew  a  great  deal  of 
money  from  the  market  just  when  it  was  most 
needed.  In  recent  years,  therefore,  it  became 
necessary  for  the  Secretary  of  the  Treasury 
to  deposit  Government  money  in  the  banks  at 


32  THE  MACHINERY 

times  to  prevent  stringency  in  the  money  mar- 
ket. 

Now  that  the  twelve  Federal  Reserve  Banks 
are  in  operation,  the  Sub-Treasuries  are  be- 
ginning to  look  like  an  unnecessary  duplication 
of  Government  facilities,  since  the  banks  could 
without  difficulty  perform  all  the  work. 


CHAPTER  III 

The  Money  and  Credit  Markets 

THE  word  "money"  is  used  in  Wall  Street 
and   in   commercial   circles   generally  to 
mean  two  entirely  separate  and  distinct 
things.    This  is  unfortunate,  since  it  causes  a 
great  deal  of  confusion  in  the  minds  not  only 
of  students  and  novices,  but  even  in  quarters 
where  a  better  knowledge  might  naturally  be 
expected.      It   is    therefore    necessary    to   get 
these  two  meanings  thoroughly  in  mind  before 
considering  the  workings  of  the  money  market. 
The  first  meaning  of  money  is  cash  or  cur- 
rency— gold,   silver   and   paper   money   of   all 
kinds.     This   is   the   money   we  carry  in  our 
pockets,   or   which   is   deposited   in   the   Sub- 
Treasury,  or  imported  and  exported,  or  shipped 
back   and   forth   between   the   country   banks 
and  those  located  in  the  big  financial  centers. 
The  second  meaning  of  money  is  short-term 
credit,   such   as   call   loans,   time   loans,   com- 
mercial paper,  checks,  bank  deposits,  etc.  For 
example,  when  a  man  says  he  has  money  in  his 
33 


34  THE  MACHINERY 

purse  he  refers  to  the  first  meaning  of  the 
word,  but  when  he  speaks  of  his  money  in  the 
bank  he  means  something  very  different — his 
credit  balance  at  the  bank. 

This  double  use  of  the  word  grew  up  because 
a  credit  balance  at  the  bank  could  be  instantly 
turned  into  money  at  any  time.  When  the 
savings  bank  depositor  takes  a  hundred  dollars 
of  cash  around  to  his  bank  and  deposits  it,  he 
knows  that  he  can  draw  that  cash  out  again 
whenever  he  wants  it,  and  very  naturally  he 
speaks  of  his  "money"  in  the  bank;  but  the 
bank  does  not  hold  all  its  depositors'  money 
in  the  form  of  cash.  If  it  did  it  could  not 
pay  any  interest,  since  to  earn  interest  it  must 
loan  the  money  out  in  some  way.  The  bank 
simply  credits  its  patron  with  the  amount  of 
his  deposit,  and  what  he  really  has  in  the 
bank  is  a  credit  balancej 

Thus  the  "money  market"  is  really  a  credit 
market,  for  hardly  any  one  ever  borrows  or 
lends  the  actual  cash.  Nearly  all  the  trans- 
actions in  the  money  market  are  in  bank 
checks,  which  merely  serve  to  transfer  bank 
credits  from  one  person  to  another.  Even 
loans  on  the  notes  of  business  firms — commer- 


OF  WALL  STREET  35 

cial  paper — which  may  run  for  six  months  or 
a  year  or  even  longer,  are  included  in  the  gen- 
eral term  "money  market." 

How  the  Money  Rate  is  Fixed 

Since  credit  can  be  transferred  anywhere  in 
the  United  States  by  the  simple  process  of 
mailing  a  check,  or  even  by  telegraph  if  neces- 
sary, the  whole  country  is  practically  included 
in  the  "money  market."  A  merchant  in  Kansas 
City  wants  to  borrow  $10,000  for  the  purpose 
of  increasing  his  stock  of  goods.  He  goes  to 
his  bank  and  if  his  credit  standing  is  good 
the  bank  lends  him  the  money.  This  perhaps 
leads  the  Kansas  City  bank  to  withdraw  $10,- 
000  which  it  was  carrying  on  deposit  in  a  Chi- 
cago bank,  and  may  again  lead  the  Chicago 
bank  to  draw-  an  equal  amount  from  its  New 
York  correspondent  bank  or  trust  company. 

In  all  these  transfers  of  credit  no  cash  is 
moved  unless  the  bankers  of  one  city  or  com- 
munity, taken  as  a  whole,  begin  to  find  them- 
selves short  of  cash.  Then  they  arrange  for 
the  transfer  of  currency  or  gold  from  some 
other  city. 

For  instance,  if  Chicago  banks  find  them- 


36  THE  MACHINERY 

selves  running  short  of  cash  while  New  York 
still  has  plenty,  the  rate  of  exchange  at  New 
York  on  Chicago  will  rise  to  such  a  premium 
that  it  will  be  cheaper  for  New  York  to  send 
the  actual  cash  than  to  buy  exchange  on  Chi- 
cago. The  workings  of  the  foreign  and  do- 
mestic exchange  markets  will  be  explained 
more  fully  in  the  next  chapter. 

Most  of  the  borrowing  and  lending  done 
in  the  entire  country  is  thus  arranged  privately 
between  individuals  or  firms  and  institutions 
and  the  rates  of  interest  are  fixed  by  two  in- 
fluences:  (1)  the  credit  standing  of  the  bor- 
rower— the  rate  being  lowest  to  the  concern 
whose  credit  is  the  strongest ;  and  (2)  the  gen- 
eral demand  and  supply  of  money,  as  observed 
by  each  bank  in  its  dealings  with  business  men 
and  with  other  banks. 

Under  ordinary  circumstances  more  than 
half  of  the  total  bank  clearings  of  New  York 
City  result  from  stock  and  bond  operations  of 
one  kind  or  another,  though  not  all  on  the 
Stock  Exchange. 


OF  WALL  STREET      v  37 

Call  Money 

The  principal  form  of  credit  that  arises  from 
these  extensive  security  transactions  is  that 
known  as  "call  money."  The  broker  or  dealer 
in  stocks  and  bonds  naturally  wants  to  borrow 
the  very  large  amount  of  credit  that  he  re- 
quires at  the  lowest  possible  rate  of  interest, 
and  the  bank  can  afford  to  allow  the  lowest  in- 
terest rate  on  loans  that  it  can  call  in  at  any 
time  when  the  money  may  be  needed  for  other 
uses.  This  situation  gives  rise  to  the  very  gen- 
eral use  of  call  money  in  Wall  Street. 

The  market  for  call  money  is  so  broad  and 
so  large  a  part  of  the  demand  is  from  mem- 
bers of  the  Stock  Exchange  that  it  is  conven- 
ient for  the  brokers  to  gather  in  the  "money 
crowd"  after  the  close  of  the  regular  market 
each  day  and  bid  for  and  offer  call  money  just 
as  they  do  a  stock  during  the  session.  The 
principal  supply  comes  from  a  comparatively 
small  number  of  institutions  that  make  a  sort 
of  specialty  of  this  class  of  business. 

While  the  interest  rate  on  call  money  is  gen- 
erally lower  than  that  on  money  loaned  for  a 
fixed  period  of  time,  it  may  be  higher  under 
exceptional  circumstances.  When  there  is  a 


38  THE  MACHINERY 

great  scarcity  of  available  credit,  usually  as 
the  result  of  panic,  time  loans  may  be  unob- 
tainable, and  since  the  broker  must  have  credit 
or  fail,  a  tremendous  demand  sometimes  con- 
verges on  the  call  money  crowd,  forcing  the 
rate  to  high  figures.  There  have  been  occa- 
sions when  the  rate  has  gone  to  365  per  cent, 
or  even  higher — call  money  being  excepted 
from  the  operation  of  the  usury  laws. 

It  is  probable  that  these  extreme  quotations 
for  money  have  now  been  done  away  with  by 
the  new  Federal  Reserve  Bank  system,  since 
that  provides  for  an  elasticity  of  currency  and 
credit  in  cases  of  emergency  that  will  prevent 
the  conditions  that  have  sometimes  arisen  in 
the  past  when  money  was  almost  unobtainable 
at  any  price. 

Commercial  Paper  Rates 

The  call  money  rate  fluctuates  so  widely  and 
at  times  so  violently  that  it  does  not  afford 
the  best  index  of  the  money  market  as  a  whole. 
The  commercial  paper  rate,  however,  reflects 
general  money  conditions  pretty  faithfully  and 
is  the  nearest  approach  we  have  to  the  official 
Government  bank  rates  of  Europe. 


OF  WALL  STREET  39 

Six  per  cent,  has  in  the  past  been  a  relatively 
high  rate  for  commercial  paper  at  New  York 
and  4  per  cent,  has  been  a  relatively  low 
rate.  After  the  Federal  Banks  went  into  op- 
eration, in  November,  1914,  money  rates 
tended  downward  and  for  two  years  were  ab- 
normally low.  This  was  partly  due  to  the 
great  increase  in  credit  made  possible  by  the 
new  law  and  partly  to  the  big  gold  imports 
resulting  from  the  war  demand  for  our  pro- 
ducts abroad. 

This  was  a  temporary  condition  and  in  due 
time  commercial  paper  rates  again  reached  6 
per  cent. ;  but  it  is  likely  that  such  extreme 
rates  as  8  or  10  per  cent,  at  New  York  will 
in  future  be  avoided,  for  the  same  reasons 
that  will  prevent  very  high  call  money. 

Credit  in  the  Banks 

Since  the  banker  is  primarily  a  merchant  in 
credit,  any  considerable  increase  in  borrowing 
either  on  collateral  security  or  on  commercial 
notes  will  at  once  be  reflected  in  the  loan  ac- 
counts of  the  banks.  And  a  moment's  thought 
shows  that  it  will  also  be  reflected  in  the  de- 
posit accounts;  for  when  the  banker  grants  a 


40  THE  MACHINERY 

loan  to  his  customer  he  simply  credits  the 
amount  of  the  loan  to  the  customer's  deposit 
account  with  the  bank.  Thus  bank  loans  and 
deposits  tend  to  rise  and  fall  together. 

Since  the  bank  has  the  right  to  loan  out  not 
only  the  money  deposited  with  it  by  its  pa- 
trons but  also  its  own  capital  and  surplus  if 
it  so  desires,  loans  may  exceed  deposits  and, 
taking  the  country  as  a  whole,  they  nearly 
always  do;  but  for  the  New  York  banks  (ex- 
cluding the  trust  companies)  loans  and  de- 
posits are  usually  not  far  from  equal,  some- 
times one  account  being  the  greater  and  some- 
times the  other. 

Credit  Based  on  Money 

Since  the  banks  have  to  keep  a  fixed  per 
cent,  of  cash  reserve  behind  their  deposits,  and 
since  deposits  rise  with  an  increase  in  loans,  it 
follows  that  cash  reserves  set  a  limit  on  loans. 
This  condition  has  often  been  likened  to  an  in- 
verted pyramid,  the  cash  forming  a  small  base 
at  the  bottom  on  which  a  large  amount  of 
credit  is  built  up.  A  comparatively  small  in- 
crease in  cash  permits  a  large  growth  of  credit, 


OF/WALL  STREET  41 

while  a  decrease  in  cash  necessitates  a  much 
greater  contraction  of  credit. 

Changes  in  the  supply  of  cash  in  the  banks 
depend  upon  four  factors : 

(1)  The  amount  of  money — in  the  sense  of 
cash  and  currency — being  used  by  the  business 
of  the  country;  that  is,  carried  about  in  peo- 
ple's pockets,  kept  in  their  tills,  or  hidden  away 
in  old  stocking-feet.    There  is  more  difference 
in  this  factor  at  various  times  than  might  be 
expected  at  first  thought.     When  people  are 
prosperous   they   carry   more   money.     When 
business  is  good,  tradesmen  have  more  money 
in  their  cash  registers.    And  when  for  any  rea- 
son a  feeling  of  panic  spreads  among  the  peo- 
ple, a  great  deal   of  money  is  hidden  away. 

The  reason  is  that  panic  at  times  jerks  the 
cash  out  from  under  the  pyramid  of  credit  and 
brings  the  structure  down  with  a  smash.  In 
the  past  we  have  had  no  way  of  increasing 
the  supply  of  cash  at  such  times,  but  the  Fed- 
eral Reserve  law  permits  such  an  increase  and 
it  is  hoped  that  panics  may  thus  be  avoided. 

(2)  Exports  and  imports  of  gold. 

(3)  Production  of  gold  in  the  United  States. 


42  THE  MACHINERY 

(4)  The  amount  of  cash  carried  in  the  sev- 
eral Sub-Treasuries.  T> 

Since  Wall  Street  is  the  great  banking  cen- 
ter, any  increased  demand  for  cash  is  usually 
passed  along  to  Wall  Street  by  the  country 
banks.  On  the  other  hand,  gold  imports  and 
Sub-Treasury  operations  are  mostly  centered 
at  New  York,  so  that  any  increase  in  the  sup- 
ply of  cash  is  quickly  felt  there.  The  result 
is  that  Wall  Street,  in  this  matter  of  cash  sup- 
ply as  in  most  other  ways,  is  a  sort  of  barome- 
ter of  conditions,  and  is  far  more  sensitive  to 
changes  than  other  sections  of  the  country. 

Brokers'  Credits 

Active  brokers  often  buy  and  sell  several 
hundred  thousand  dollars  worth  of  stocks  or 
bonds  in  a  single  day.  These  are  paid  for  by 
certified  checks.  Hence  the  same  broker  may 
pay  out  half  a  million  dollars  in  certified  checks 
during  the  day,  while  at  the  same  time  he  re- 
ceives an  equal  amount  from  other  brokers. 
If  there  were  no  way  of  off-setting  these  cred- 
its before  the  end  of  the  day,  he  would  have 
to  carry  half  a  million  dollars  of  loans  all  the 
time  simply  as  a  matter  of  bookkeeping. 


OF  WALL  STREET  43 

To  avoid  this  the  practice  of  over-certifica- 
tion arose,  by  which  the  bank  certified  the 
broker's  checks  to  an  amount  exceeding  his 
credit  balance  with  the  bank  at  the  moment, 
while  the  broker  restored  his  balance  before 
the  end  of  the  day  by  depositing  other  checks. 

This  practice  has  been  held  to  be  illegal  and 
has  now  been  mostly  abandoned  in  favor  of 
other  methods.  One  method  is  for  the  broker, 
when  doing  a  heavy  business,  to  make  fre- 
quent deposits  during  the  day,  so  that  his  ac- 
count at  any  hour,  if  it  were  to  be  reckoned 
up,  would  show  a  credit  balance.  Another 
method  is  for  the  bank  to  make  a  "morning 
loan"  to  the  broker  on  his  note,  thus  substitu- 
ting his  personal  credit  for  over-certification. 


CHAPTER  IV 

Foreign  and  Domestic  Exchange 
— Balance  of  Trade 

THE  subject  of  foreign  exchange  is  usually 
considered  so  complicated  that  the  aver- 
age man  makes  no  effort  to  understand 
it  except  in  the  most  hazy  and  general  way. 
Yet  the  principles  on  which  it  is  based  are 
simple  and  even  the  details  of  exchange  opera- 
tions are  not  so  difficult  as  they  are  commonly 
esteemed. 

Suppose,  for  example,  that  A,  an  American 
dealer  in  cotton,  makes  a  sale  to  the  value  of 
£10,000  to  a  Liverpool  firm,  B.  Of  course, 
B  does  not  want  to  go  to  the  expense  and 
trouble  of  sending  £  10,000  in  gold  to  America, 
so  he  cables  A  to  draw  on  C,  a  London  bank- 
er with  whom  B  has  a  deposit,  for  the  amount 
due.  A  then  makes  a  draft,  or  bill  of  ex- 
change, on  C  for  the  £10,000  and  deposits  it 
in  his  New  York  bank,  where  he  is  credited 
with  the  value  of  the  draft  in  dollars  at  the 
current  rate  of  exchange. 
44 


THE  MACHINERY  OF  WALL  STREET      45 

The  draft  is  usually  accompanied  by  the 
bill  of  lading  and  insurance  receipt  for  the 
shipment  of  cotton,  and  it  may  be  payable  on 
demand  or  in  30,  60  or  90  days,  according  to 
A's  arrangement  with  B.  Interest  on  the 
money  up  to  the  date  when  it  can  be  actually 
obtained  in  London  is  deducted  from  the  credit 
allowed  A  by  the  New  York  bank. 

Since  there  is  always  a  large  general  trade 
in  all  sorts  of  merchandise  between  England 
and  America,  a  great  quantity  of  these  bills 
of  exchange  are  always  afloat  in  New  York. 
They  are  transferred  by  indorsement  just  like 
checks,  and  of  course,  the  more  indorsements 
they  bear  the  stronger  they  become.  Hence  a 
market  arises  for  them  and  they  are  sold  back 
and  forth  like  stocks  or  wheat.  When  the 
demand  exceeds  the  supply  the  price  of  ex- 
change rises  above  par — which  is  $4.8666  for 
the  amount  of  gold  contained  in  the  pound 
sterling — and  if  the  supply  exceeds  the  de- 
mand the  price  falls.  Thus  we  have  a  daily 
market  price  for  sterling  exchange  and  in  the 
same  way  for  exchange  with  all  other  commer- 
cial countries. 

The  upper  limit  of  the  exchange  rate  is  the 


46  THE  MACHINERY 

cost  of  shipping  gold  to  make  the  necessary 
payment,  and  the  lower  limit  is  the  cost  of 
importing  the  gold;  for  the  American  banker 
who  must  make  a  certain  payment  at  London 
would  be  foolish  indeed  to  pay  more  for  a  bill 
of  exchange  than  it  would  cost  him  to  send  the 
gold — gold  being  the  only  form  of  money  that 
is  generally  acceptable  in  making  international 
payments.  The  gold  export  and  import  points 
vary  with  the  cost  of  freight  and  insurance  on 
the  gold.  Under  normal  conditions  the  ex- 
port point  is  about  $4.884  and  the  import  point 
$4.833. 

Thus  the  main  factor  in  fixing  exchange 
rates  is  the  relation  between  the  amount  of 
money  we  owe  other  countries  and  the  amount 
they  owe  us. 

Influence  of  the  Money  Rate 

There  is,  however,  another  factor  which 
often  has  considerable  influence,  and  that  is 
the  relative  interest  rates  on  money  in  the  two 
countries  involved.  Every  bill  of  exchange 
represents  money  and  money  may  be  worth 
a  higher  rate  of  interest  in  New  York  than  in 
London.  In  that  case  the  London  banker  to 


OF  WALL  STREET  47 

whom  a  payment  is  due  will  naturally  prefer 
to  leave  the  money  in  New  York  and  have 
it  loaned  out  at  interest  there.  Hence  New 
York  does  not  have  to  make  the  payment  at 
London  at  that  time,  this  decreases  the  demand 
for  New  York  exchange  on  London,  and  there- 
fore the  sterling  rate  at  New  York  falls.  Like- 
wise if  interest  rates  are  higher  in  London, 
New  York  bankers  want  to  send  money  there 
to  be  loaned,  which  increases  the  demand  for 
sterling  exchange  and  raises  the  rate  at  New 
York.  i 

Eventually,  however,  whatever  is  owed  has 
to  be  paid,  so  that  the  influence  of  money  rates 
is  only  temporary.  ; 

Domestic  Exchange 

The  principles  of  foreign  exchange  apply  in 
exactly  the  same  way  to  domestic  exchange 
between  the  various  cities  of  one  country.  In 
England  this  is  known  as  "inland  exchange." 

At  New  York,  for  example,  exchange  rates 
are  regularly  quoted  on  Boston,  Chicago,  St. 
Louis,  San  Francisco,  etc.,  and  these  rates  go 
to  a  premium  or  a  discount  according  to 
whether  the  balance  of  payments  between  two 


48  THE  MACHINERY 

cities  is  in  favor  of  one  or  the  other.  In  this 
case  shipments  of  money  can  be  made  in  cur- 
rency and  not  necessarily  in  gold,  but  the 
money  will  not  move  from  one  city  to  another 
unless  it  is  cheaper  to  send  it  than  to  buy  a 
draft  at  the  current  rate  of  exchange. 

How  International  Payments  Arise 

When  we  begin  to  go  deeper  into  the  sub- 
ject and  discuss  the  various  reasons  which 
lead  people  to  want  to  make  payments  in  other 
countries,  and  therefore  affect  the  rates  of  ex- 
change, we  naturally  find  many  complications, 
for  these  reasons  cover  pretty  much  the  whole 
field  of  financial,  economic  and  business  condi- 
tions. 

Broadly  speaking,  international  payments 
arise  from: 

(1)  The  purchase  and  sale  of  merchandise, 
including  all  raw  and  manufactured  products. 

(2)  Securities  bought  and   sold. 

(3)  Interest  payable  on  foreign  investments. 

(4)  Money   loaned   abroad   and   its   repay- 
ment. 

(5)  Expenses  of  travellers. 

(6)  Freights  and  insurance  payable  to  the 


OF  WALL  STREET  49 

country  where  the  shipping  or  insurance  com- 
panies are  located. 

(7)  Remittances  by  immigrants,  whether 
gifts  to  individuals  or  deposits  in  foreigti 
banks. 

With  the  exception  of  the  first,  the  amounts 
of  these  several  items  can  be  only  roughly 
guessed  at.  Our  Government  keeps  a  record 
of  merchandise  exports  and  imports,  although 
it  is  to  be  feared  that  it  is  not  as  accurate  as 
might  be  desired.  Imports,  in  particular,  are 
often  undervalued  in  order  to  reduce  the 
amount  of  ad  valorem  duties  to  be  paid.  The 
totals  of  exports  and  imports,  of  merchandise 
and  gold  separately,  are  given  to  the  press 
monthly. 

In  regard  to  the  other  items  only  indefinite 
estimates  are  possible. 

Finance  Bills 

Item  (4),  money  loaned  abroad,  is  especially 
important,  since  it  may  radically  affect  the  rate 
of  exchange,  especially  between  New  York  and 
London.  Temporary  loans  between  the  bank- 
ers of  the  two  cities  are  effected  by  means  of 
"finance  bills,"  as  they  are  called,  which  are 


50  THE  MACHINERY 

in  essence  nothing  but  30,  60  or  90  day  notes, 
issued  in  the  form  of  bills  of  exchange  drawn 
on  foreign  banks.  During  periods  of  very  high 
money  rates  at  New  York,  the  bankers  of  that 
city  have  often  sold  these  finance  bills  to  Lon- 
don in  large  amounts,  lending  the  money  thus 
obtained  at  rates  returning  a  satisfactory  profit. 

The  operation  represents  merely  a  transfer 
of  credit.  London  banks  are  glad  to  get  the 
finance  bills,  as  they  can  thus  get  a  higher  rate 
of  interest  than  could  otherwise  be  obtained 
with  the  same  degree  of  security,  and  the  New 
York  banks  in  turn  are  able  to  make  a  profit 
by  reloaning  the  money  at  a  still  better  rate. 

In  times  of  panic  the  extensive  issue  of 
finance  bills  has  several  times  affected  the  ex- 
change rate  so  much  that  many  millions  of  gold 
have  been  transferred  from  London  to  NevJ 
York  as  a  result. 

An  International  Clearing  House 

It  will  be  seen  that  the  foreign  exchange 
market  as  a  whole  serves  as  a  sort  of  inter- 
national clearing  house,  by  which  all  the  inter- 
national business  transactions  of  the  world  are 
offset  against  one  another  so  far  as  it  is  possi-1 


OF  WALL  STREET  51 

ble  for  that  to  be  done,  so  that  the  actual 
transfers  of  gold  needed  to  balance  the  account 
are  few  and  far  between  in  comparison  with 
the  tremendous  aggregate  of  the  business 
handled. 

Foreign  and  domestic  exchange  do  for  busi- 
ness substantially  what  the  bank  clearing 
house  does  for  bank  checks. 

Exchange  operations  frequently  become  very 
complicated.  For  example,  suppose  an  Ameri- 
can manufacturer  has  sold  $10,000  worth  of 
agricultural  machinery  to  Russia,  a  Russian 
grain  dealer  has  sold  $10,000  of  wheat  to  Ger- 
many, a  German  exporter  has  sold  a  like  value 
of  toys  to  South  America,  and  Brazil  has  sold 
the  same  amount  of  coffee  to  London,  while 
London  has  loaned  $10,000  to  New  York  on 
finance  bills.  Evidently  these  transactions, 
taken  together,  will  balance  each  other  with- 
out any  transfer  of  gold ;  but  before  that  can 
be  accomplished  it  is  necessary  for  the  bankers 
of  the  five  different  countries  to  get  in  touch 
with  each  other  in  some  way. 

London,  by  the  prolonged  leadership  of  Eng- 
land in  foreign  commerce,  has  grown  to  be 
the  center  through  which  such  roundabout 


52  THE  MACHINERY 

transfers  of  foreign  exchange  are  handled.  It 
had  always  been,  up  to  the  beginning  of  the 
European  war,  the  foreign  exchange  clearing 
house  of  the  world,  and  it  is  likely  that  it  will 
resume  that  position  now  that  the  war  is  over. 

Balance  of  Trade 

The  term  balance  of  trade  is  applied  to  the 
excess  of  a  country's  merchandise  exports  over 
its  imports,  or  the  excess  of  imports  over  ex- 
ports. For  a  long  time  it  was  generally  be- 
lieved that,  for  a  country  to  be  truly  prosper- 
ous, it  must  export  more  merchandise  than  it 
imported,  thus  getting  a  money  balance  in  its 
favor. 

The  absurdity  of  the  idea  is  evident  when 
we  consider  the  prosperity  of  the  world  as  a 
whole.  It  would  be  manifestly  impossible  for 
all  nations  to  go  on  continuously  importing 
gold  on  balance,  hence,  according  to  this 
theory,  one  country  could  prosper  only  at  the 
expense  of  some  other  country.  Economists 
have  long  since  come  to  see  that  foreign  trade 
is  mutually  beneficial  to  all  the  nations  in- 
volved. If  England  is  short  of  wheat  and 
America  is  short  of  tin,  it  is  plainly  to  the 


OF  WALL  STREET  53 

advantage  of  both  to  exchange  wheat  for  tin. 

Moreover,  as  we  have  already  seen,  our  for- 
eign trade  in  merchandise  is  only  one  of  numer- 
ous factors  which  affect  the  exchange  market 
and  eventually  lead  to  the  export  or  import 
of  gold.  Under  normal  conditions  before  the 
war  the  United  States  had  a  big  yearly  excess 
of  merchandise  exports  over  imports,  and  this 
excess  went  to  pay  the  interest  on  our  securi- 
ties owned  abroad,  expenses  of  our  foreign 
tourists,  transportation  charges  owed  to  for- 
eign steamship  companies,  etc.  The  situation 
is  now  reversed,  in  that  Europe  owes  us  a  big 
annual  balance  of  interest  payments  instead  of 
our  owing  Europe.  How  Europe  will  meet 
these  payments  is  as  yet  unsettled. 

But  although  our  exports  or  imports  bal- 
ance has  no  permanent  significance,  it  does 
have  an  important  bearing  on  our  immediate 
prospects  for  prosperity  or  depression  in  busi- 
ness. An  unusually  large  export  balance  of 
merchandise  means  an  early  flow  of  gold  and 
credit  to  this  country,  and  that  must  neces- 
sarily exercise  a  powerful  and  beneficial  effect 
upon  our  industries  and  our  security  markets. 
On  the  other  hand,  if  our  exports  balance  falls 
to  a  low  level  or  is  even  transformed  into  an 


54  THE  MACHINERY 

import  balance — as  occasionally  happens — 
gold  or  credit  or  both  will  flow  out  of  our 
banks  to  foreign  countries,  to  our  temporary 
disadvantage. 

For  this  reason  Wall  Street  always  watches 
the  gold  movement  closely  and  studies  the 
monthly  figures  of  our  merchandise  balance  of 
exports  or  imports. 

An  unusually  heavy  movement  of  mer- 
chandise exports  may  not  result  in  immediate 
gold  imports,  for  our  bankers  may  prefer 
credit  to  gold.  If  our  bank  reserves  are  over- 
flowing with  gold,  there  is  no  advantage  in 
drawing  more  gold  from  abroad  simply  be- 
cause it  is  due  us  on  the  balance  of  our  mer- 
chandise exports  over  imports.  If  London 
owes  New  York  $100,000,000  as  a  result  of  our 
big  exports,  New  York  may  prefer  to  leave 
the  money  at  interest  in  London,  and,  of 
course,  will  do  so  if  the  interest  rate  is  higher 
abroad  than  at  home. 

Considered  as  a  broad   economic   question, 
there   is   neither  advantage  nor  disadvantage 
in  a  "favorable  balance  of  trade."    But  the  im- 
mediate effect  of  such  a  balance  on  our  busi 
ness  conditions  is  always  stimulating. 


CHAPTER  V 

The  Corporation  as  an  Element  in 
Wall  Street 

SINCE  all  stocks  and  bonds  are  issued  by 
corporations,  there  would  be  very  little 
to  Wall  Street  without  the  corporation. 
It  is  the  corporation  which  makes  possible  the 
centralization  of  capital,  the  accumulation  of 
great  funds  in  a  single  organization  and  the 
unified  control  of  big  enterprises.  Hence  with- 
out the  corporation  the  stock  and  bond  markets 
would  be  non-existent,  the  money  market 
would  be  much  more  restricted  and  even  the 
foreign  exchange  market  would  be  somewhat 
affected. 

About  the  only  department  of  the  Street 
which  would  be  uninfluenced  by  the  abolition 
of  corporations  would  be  the  commodity  mar- 
kets. At  present  a  great  deal  of  business  is 
done  even  in  cotton,  grain,  coffee,  copper,  etc., 
by  corporations,  but  the  corporation  is  not  a 
necessary  element  in  the  handling  of  those 
lines. 

55 


56  THE  MACHINERY 

Origin  of  the  Corporation 

The  idea  of  creating  "an  invisible,  intangible 
person  existing  only  in  contemplation  of  law," 
endowed  by  the  state  with  the  right  to  transact 
certain  business  and  limited  by  a  charter,  orig- 
inated in  Rome,  as  did  most  of  the  devices  of 
modern  commerce. 

Under  the  Roman  law  three  or  more  persons 
might  organize  a  corporation.  Apparently 
each  person  must  have  had  something  to  show 
for  his  part  in  the  ownership,  corresponding 
roughly  to  the  stock  certificate  of  our  times, 
but  exactly  what  it  was  history  has  not  re- 
corded. From  the  fact  that  the  Roman  law 
'had  so  little  to  say  about  corporations  it  is 
natural  to  conclude  that  such  organizations  did 
not  enter  largely  into  the  business  life  of  that 
day. 

The  business  corporation  as  we  now  know 
it  is  of  very  modern  growth.  In  deciding  a 
case  in  England  in  1770,  Lord  Mansfield  said 
of  the  stock  certificate :  "This  is  a  new  species 
of  property  arisen  within  the  compass  of  a  few 
years."  The  point  to  be  decided  in  that  case 
was  whether  a  'stock  certificate  was  money 


OF  WALL  STREET  57 

and  Mansfield  held  that  it  was  not.  The  very 
nature  of  the  suit  shows  that  at  that  date 
stock  certificates  lacked  definite  standing  in  the 
courts. 

Hence  the  corporation  as  an  important  ele- 
ment in  business  made  its  appearance  almost 
simultaneously  with  the  birth  of  the  United 
States  as  a  nation,  and  it  is  here  that  corpora- 
tions have  made  the  greatest  growth  and  have 
been  subjected  to  the  least  legal  control.  This 
has  been  due  largely  to  the  division  of  powers 
between  the  states  and  the  Federal  Govern- 
ment. As  each  state  has  the  right  to  charter 
corporations,  the  states  have  competed  with 
one  another  for  the  business  and  have  therefore 
been  more  and  more  liberal  in  the  powers 
granted  by  charter.  Of  late,  however,  it  has 
appeared  that  the  corner  had  been  turned  in 
this  growth  of  liberality  on  the  part  of  the 
several  states,  and  the  Federal  government, 
through  its  control  of  interstate  business,  has 
been  taking  an  increasing  hand  in  corporation 
control. 


58  THE  MACHINERY 

The  Corporation  a  Necessity 

While  there  is  now,  and  always  has  been 
in  this  country,  a  good  deal  of  antagonism 
toward  the  corporation  because  of  frequenti 
abuses  of  power,  yet  the  great  majority  of  the 
people  recognize  the  absolute  necessity  of  some 
such  form  of  business  organization. 

It  is  difficult  to  imagine  any  way  in  which 
the  Pennsylvania  Railroad,  for  example,  could 
be  managed  except  as  a  corporation.  To  build 
up  such  an  enterprise  a  vast  amount  of  capital 
must  be  drawn  together  and  welded  into  a 
practical,  working  unit.  Each  contributor 
must  have  something  to  show  for  his  part  in 
the  enterprise.  The  business  must  be  con- 
trolled by  officers,  for  the  number  of  partners 
is  too  great  for  personal  consultation  in  regard 
to  the  policies  of  the  company.  The  powers 
of  these  officers,  as  well  as  the  rights  of  the 
partners,  must  be  established  by  law,  as  other- 
wise the  officers  would  be  too  nearly  omnipo- 
tent for  the  good  of  either  the  community  or 
the  stockholders. 

Also,  the  business  of  such  a  company  is  of 
necessity  permanent.  The  death  of  a  partner 


OF  WALL  STREET  59 

cannot  be  permitted  to  disturb  the  continuity 
of  the  enterprise.  Business  policies  must  be 
laid  out  far  into  the  future,  with  a  view  to  the 
successful  development  of  the  company  and 
without  regard  to  the  immediate  financial 
necessities  of  any  individual.  In  the  building 
of  the  Pennsylvania  tunnel  and  terminal  in 
New  York  City  the  officers  of  the  company 
were  looking  ahead  half  a  century  or  more, 
and  that  far-sighted,  impersonal  view  is  abso- 
lutely necessary  for  the  best  results,  no  matter 
whether  we  consider  the  interests  of  the  stock- 
holders or  of  the  public. 

The  Holding  Company 

Among  the  powers  frequently  granted  by 
the  states  to  corporations  has  been  that  of 
buying  and  holding  the  stocks  or  bonds  of 
other  corporations.  Out  of  this  arose  the  hold- 
ing company — a  corporation  formed  for  the 
purpose  of  owning  and  controlling  other  com- 
panies. Around  this  plan  a  tremendous  amount 
of  litigation  has  centered,  but  the  holding  com- 
pany still  exists  and  is  pracllcally  undamaged 
in  its  essential  features. 

The  holding  company  is  not  strictly  neces- 


60  THE  MACHINERY 

sary  for  the  transaction  of  business,  as  is  the 
corporation.  We  could  get  along  very  conn 
fortably  without  it.  But  it  has  substantial  ad- 
vantages when  its  great  powers  are  not  abused. 
The  principal  advantage  has  undoubtedly  been 
the  greater  facility  with  which  a  big  business 
unit  can  be  built  up. 

Perhaps  there  is  a  point  beyond  which  the 
growth  of  the  business  unit  brings  no  addi- 
tional advantage,  though  that  remains  to  be 
proved.  The  fact  that  some  widely  extended 
corporations  have  shoAvn  a  tendency  to  fall  to 
pieces  of  their  own  weight  does  not  necessarily 
show  that  they  were  too  big — the  trouble  may 
have  been  that  their  managers  were  not  big 
enough.  But  the  fact  has  certainly  been 
demonstrated  that  as  a  general  rule  the  big 
business  has  advantages  over  the  little  business 
in  permanency,  in  economical  operation, 
in  distribution  of  risks,  and  in  obtaining  and 
being  able  to  pay  for  competent  managers. 

The  holding  company  is  especially  useful  in 
handling  doubtful  or  highly  speculative  under- 
takings. For  example,  take  a  dozen  small 
companies  each  of  which  is  engaged  in  develop- 
ing a  prospect  for  a  gold  mine.  Each  of  these 


OF  WALL  STREET  61 

dozen  different  enterprises  is  necessarily 
doubtful,  for  the  prospect  may  not  prove  to 
be  a  good  one.  Even  after  the  mine  is  in  oper- 
ation the  supply  of  paying  ore  may  give  out 
at  any  time.  Hence  investors  hesitate  to  put 
their  money  into  it.  But  when  the  twelve 
small  companies  are  combined  under  the 
ownership  of  a  holding  company  the  risks  are 
greatly  reduced.  If  one  mine  proves  a  failure 
another  may  do  twice  as  well  as  expected.  If 
a  vein  "pinches  out"  at  one  point  a  still  better 
vein  may  be  located  elsewhere.  The  stock- 
holders in  the  holding  company  get  the  benefit 
of  the  principle  of  averages  and  their  invest- 
ment is  therefore  much  more  secure  than  if 
placed  in  any  one  mine  alone. 

The  same  principle  applies  to  the  public  util- 
ity holding  company,  which  operates,  perhaps, 
street  railways,  gas  and  electric  companies  in 
twenty  different  cities.  If  the  gas  business  is 
less  prosperous  than  expected,  the  electric 
branch  of  the  undertaking  may  be  more  so.  lij 
one  city  fails  to  flourish,  another  may  grow 
with  unexpected  rapidity.  The  investor  is  safe- 
guarded against  accident  and  his  average  year- 
ly returns  are  more  secure. 


62  THE  MACHINERY 

There  are  two  principal  objections  to  the 
holding  company.  One  is  that  minority  stock- 
holders in  subsidiary  companies  may  not  get 
a  fair  deal,  because  the  interests  of  the  holding 
company  as  a  whole  may  not  exactly  coincide 
with  the  interests  of  minority  stockholders  in 
the  various  sub-companies.  The  other  is  that 
the  multiplication  of  corporations  like  wheels 
within  wheels  makes  dishonest  management 
easier  to  conceal. 

Whatever  tends  toward  simplicity  of  organi- 
zation is  best  and  likely  to  prove  most  perma- 
nent. For  that  reason  a  direct  merger  of  sev- 
eral small  corporations  into  one  larger  one, 
where  that  is  possible,  is  undoubtedly  better 
than  to  employ  the  holding  company  device. 
This  is  the  direction  in  which  corporation  or- 
ganization is  now  tending,  but  such  a  merger 
is  often  difficult  to  bring  about,  and  the  device 
of  the  holding  company  may  sometimes  permit 
a  beneficial  enlargement  of  the  unit  of  business 
operation  which  otherwise  could  not  be  ob- 
tained. In  many  cases  the  holding  company 
comes  first,  as  the  only  possible  way  at  the 
time  to  get  the  benefits  of  larger  operations, 


OF  WALL  STREET  63 

and  is  followed  later  by  an  outright  merger 
when  that  becomes  feasible. 

Stock  Watering 

When  a  corporation  is  formed  the  question 
at  once  arises  how  much  stock  shall  be  issued; 
Since  each  share  of  stock  represents  nothing 
except  a  fraction  of  the  whole  enterprise,  it 
really  makes  no  difference  how  many  are  is- 
sued. If  the  business  is  worth  $1,000,000  and 
only  1,000  shares  are  issued,  then  each  share  is 
worth  $1,000;  if  10,000  shares  are  issued,  each 
is  worth  $100 ;  and  if  100,000  shares  are  issued, 
each  is  worth  only  $10. 

The  trouble  arises  when  each  share  is  given 
a  par  value — a  term  which  as  applied  to  stocks 
really  means  nothing  at  all.  If  in  the  above 
case  100,000  shares  were  issued  having  a  nom- 
inal par  value  of  $100  each,  then,  according  to 
the  current  use  of  the  terms,  nine-tenths  of  the 
stock  would  be  "water" — that  is,  would  repre- 
sent no  tangible  value.  But  the  real  mistake  is 
in  giving  the  shares  a  par  value  of  $100  when 
they  represent  only  $10  each,  and  if  the  in-3 
vestor  understands — as  most  investors  do  if 


64  THE  MACHINERY 

they  stop  to  think — that  the  term  par  value 
does  not  pretend  to  represent  the  actual  value 
of  the  property  behind  the  stock,  then  he  is  not 
deceived,  and  the  question  of  how  many  shares 
of  stock  are  issued  is  merely  one  of  bookkeep- 
ing. 

In  practice  it  is  generally  impossible  to  say 
just  what  value  any  share  of  stock  represents, 
because  the  worth  of  the  whole  enterprise  does 
not  necessarily  depend  on  the  value  of  its 
tangible  assets.  A  corporation  owning  $1,000,- 
000  worth  of  property  may  not  be  able  to  earn 
anything  for  its  stock,  while  another  owning 
only  $100,000  worth  may  pay  50  per  cent, 
yearly  on  its  stock. 

For  the  above  reason  it  is  gradually  becom- 
ing the  custom  to  assign  no  par  value  to  an 
issue  of  common  stock.  Each  share  then  pur- 
ports to  be  just  what  it  is — a  specified  fraction 
of  an  enterprise,  of  unknown  value.  It  is  the 
business  of  the  investor  to  decide  for  himself 
what  that  value  is. 

It  is  curious  how  often  the  public  gets  ex- 
cited about  the  wrong  thing.  Probably  the 
majority  of  the  people  consider  "watered 
stock"  the  crowning  iniquity  of  Wall  Street; 


OF  WALL  STREET  65 

yet  the  whole  trouble  lies  in  the  highly  re- 
spected term  "par  value."  A  bond  or  a  note 
has  par  value,  because  it  represents  a  specified 
amount  of  money  to  be  paid  at  a  definite  time. 
A  share  of  stock  has  no  par  value  because  it 
represents  nothing  but  a  fractional  ownership 
in  the  company,  which  may  be  worth  at  some 
times  more,  at  other  times  less, 

Preferred  Stock 

Since  a  stock  certificate  represents  nothing 
but  a  share  in  the  business,  why  do  we  have 
two  classes,  preferred  and  common?  The 
answer  is,  to  accommodate  different  kinds  of 
investors.  Investors  wish  to  take  differing  de- 
grees of  risk  for  corresponding  degrees  of 
profit.  One  wants  merely  his  interest  and  his 
original  money  back  in  two,  ten  or  fifty  years ; 
he  buys  a  bond.  Another  is  willing  to  take 
a  direct  share  in  the  business,  but  wants  to  be 
reasonably  sure  of  his  interest ;  for  him  the 
preferred  stock  is  created,  giving  him  a  higher 
interest  than  the  bond  but  limiting  the  interest 
rate  to  a  fixed  amount  yearly,  so  that  he  is 
excluded  from  the  higher  rate  of  profits  that 
the  common  stock  may  some  time  earn ;  a  third 


66  THE  MACHINERY 

is  willing  to  take  the  greater  risk  of  the  com- 
mon stock  in  the  hope  of  participating  in  the 
greater  profits  which  may  accrue  to  it. 

It  is  a  somewhat  common  practice  for  a  cor- 
poration to  issue  preferred  stock  up  to  the 
estimated  value  of  its  tangible  property  (after 
deducting  the  amount  of  the  bonds  outstand- 
ing), thus  leaving  the  common  stock  to  repre- 
sent only  good-will,  patent  rights,  and  prob- 
able or  possible  earnings  above  ordinary  inter- 
est rates.  Then  if  the  business  turns  out  as 
well  as  expected  the  common  stock  gradually 
becomes  more  and  more  valuable ;  but  if  results 
are  disappointing  the  common  may  never  have 
any  real  value. 

There  need  be  no  serious  objection  to  this 
method  of  organization  so  long  as  the  buyer  of 
the  common  stock  knows  what  he  is  getting, 
but  there  is  a  phase  of  dishonesty  in  engraving 
"Par  Value  $100"  on  stock  certificates  of  this 
character.  At  best  it  can  only  mean  that  the 
promoters  hope  the  stock  will  some  day  be 
worth  $100  a  share.  And  yet  Congress  is  con- 
sidering a  law  to  prohibit  the  issue  of  stocks 
without  a  par  value! 


OF  WALL  STREET  67 

Limited  Liability 

A  partner  in  a  business  is  personally  liable 
for  all  its  debts.  A  small  partner — say  the 
owner  of  one  share — in  the  Pennsylvania  Rail- 
road could  hardly  take  this  risk.  Hence  it  is 
necessary  that  the  liability  of  stockholders  be 
limited  to  the  amount  paid  in.  The  worst 
that  can  happen  to  them  is  to  lose  their  invest- 
ment. 

On  the  other  hand,  this  evidently  increases 
the  danger  of  foreclosure  and  reorganization 
during  periods  of  unprofitable  business.  The 
members  of  a  partnership  may  pull  through  by 
using  their  personal  credit,  but  the  corporation 
has  no  personal  credit. 

Foreclosure  may  be  forced  by  any  holder 
of  the  company's  bonds,  notes,  or  unpaid  ac- 
counts due,  who  cannot  get  his  money  from  the 
company.  Under  foreclosure  the  common 
stockholders  can  usually  regain  control  of  the 
company  if  they  are  willing  to  put  up  the  nec- 
essary money  to  pay  its  debts  and  set  it  on 
its  feet  again — which,  of  course,  they  hardly 
ever  do.  Sometimes  the  preferred  stockhold- 
ers reorganize  the  business  and  pay  its  debts ; 
but  in  most  cases  the  company  goes  to  the 
bondholders,  who  are  obliged  to  take  it  over 
and  run  it  in  order  to  get  their  money  out  of  it. 


CHAPTER  VI 

The  Bond  Market 

WHEN  a  corporation  desires  to  attract 
capital,  for  the  prosecution  of  an  en- 
terprise that  its  managers  believe  will 
prove  profitable,  it  will  naturally  offer  for  sale 
different  classes  of  securities  adapted  to  the 
varied  requirements  of  the  numerous  investors 
who  are  to  be  interested. 

For  the  man  who  wants  to  be  an  actual  part- 
ner in  the  enterprise,  to  take  the  risk  of  its  fail- 
ure along  with  the  possibility  of  very  large 
profits,  the  common  stock  is  created.  For  the 
more  conservative  investor,  but  who  neverthe- 
less wants  a  good  interest  return,  one  or  more 
classes  of  preferred  stock  are  issued. 

But  a  large  number  of  investors  do  not  want 
any  share  in  the  enterprises  at  all — they  simply 
want  interest  on  their  money.  For  them  bonds 
are  offered,  bearing  a  fixed  rate  of  interest  and 
payable  in  cash  at  maturity. 

What  Is  a  Bond? 

The  bond  itself  is  nothing  but  a  note  under 
seal.     In  that  particular  all  bonds  are  alike. 
68 


THE  MACHINERY  OF  WALL  STREET      69 

But  the  essential  feature  of  a  bond  is  the  secur- 
ity behind  it,  and  in  that  bonds  vary  In  almost 
every  conceivable  way. 

There  may  in  fact  be  no  security  behind  the 
bond.  It  may  be  nothing  but  the  corporation's 
promise  to  pay — an  unsecured  note — as  in  the 
case  of  the  debenture  bond.  Such  a  bond  is 
a  lien  on  the  assets  of  the  company,  but  not 
on  any  specified  assets.  Hence  all  creditors 
who  have  any  specified  liens  on  particular  as- 
sets must  be  satisfied  before  the  holders  of  .the 
debenture  bonds  can  get  anything. 

Almost  any  sort  of  provision  can  be  in- 
serted in  a  bond.  For  example,  there  is  the 
income  bond,  on  which  interest  is  payable  if  it 
is  earned  and  not  otherwise.  The  only  way 
in  which  it  differs  from  the  first  preferred  stock 
is  that  it  has  a  definite  date  of  maturity  while 
the  stock  has  no  maturity.  It  is  a  very  poor 
class  of  security.  The  object  in  creating  an 
income  bond  is  to  attach  a  high  sounding  name 
to  a  low  grade  of  security. 

The  great  majority  of  bonds,  however,  are 
secured  by  mortgage.  Such  a  bond  is  prac- 
tically a  fraction  of  a  mortgage;  that  is,  each 
bond  is  a  note  under  seal,  and  its  security  con- 


70  THE  MACHINERY 

sists  of  a  fraction  of  a  mortgage  which  covers 
all  the  bonds  of  that  class  together. 

The  property  covered  by  the  mortgage  is 
explained  in  the  bond,  and  is  of  course  speci- 
fied more  exactly  in  the  mortgage  itself.  It 
may  be  a  first,  second  or  third  mortgage,  in 
which  case  the  first  must  be  satisfied  before 
the  second,  the  second  before  the  third,  etc. 

It  may  be  a  "general"  mortgage,  covering  a 
great  deal  of  property  on  which  other  mort- 
gages have  already  been  placed — the  other 
mortgages  constituting  "prior  liens."  In  such 
cases  a  long  investigation  is  usually  necessary 
to  find  out  exactly  what  security  lies  behind 
the  general  mortgage.  The  individual  investor 
is  hardly  ever  in  a  position  to  make  such  an 
investigation  and  he  has  to  depend  on  his  bond 
dealer  to  make  it  for  him.  For  this  reason 
he  should  deal  only  with  bond  houses  of  estab- 
lished reputation. 

The  name  of  a  bond  tells  nothing  about  its 
degree  of  safety.  For  example,  a  debenture 
bond,  which  is  an  unsecured  note,  may  be  a 
great  deal  better  than  a  mortgage  bond.  It 
depends  on  what  other  securities  precede  the 
bond  in  each  case  and  on  the  amount  of  asserts 


OF  WALL  STREET  71 

and  earnings  available  for  that  particular  bond. 
A  municipal  bond  is  practically  a  debenture, 
but  since  it  is  not  preceded  by  any  other  form 
of  security  it  constitutes  a  lien  on  the  property 
within  the  municipality  and  therefore  as  a  rule 
ranks  very  high.  Some  industrial  corporations 
have  no  bonds  outstanding  except  a  small 
amount  of  debentures,  and  their  bonds  there- 
fore may  rank  much  higher  than  the  general 
mortgage  bonds  of  a  railroad  which  is  liberally 
plastered  with  prior  liens. 

Some  very  odd  situations  are  encountered  in 
the  study  of  bonds.  There  is  a  small  railroad 
in  the  South  which  has  no  securities  outstand- 
ing except  first  mortgage  bonds  and  short  term 
notes  for  floating  indebtedness.  In  this  case 
the  bonds  are  about  equivalent  to  stock ;  for  the 
notes  mature  first  and  being  all  construction 
liens  of  one  kind  or  another  they  get  the  first 
crack  at  the  assets.  The  bondholders  are  the 
sole  owners  of  the  property,  but  nevertheless 
they  are  entitled  only  to  their  interest  and  pay- 
ment at  maturity.  If  a  big  surplus  should  be 
built  up  it  would  belong  to  the  company,  but 
no  individual  could  get  any  of  it  without  a 
change  in  the  form  of  the  organization. 


72  THE  MACHINERY 

The  convertible  bond  should  perhaps  be 
classed  as  the  highest  form  of  security  which 
can  be  issued — provided,  of  course,  that  it  is 
well  secured  by  having  plenty  of  assets  behind 
it.  A  convertible  bond  is  one  which  may  be 
turned  into  some  other  form  of  security — usu- 
ally stock — under  conditions  specified  therein. 
For  example,  take  a  debenture  bond  having 
abundant  assets  behind  it  and  convertible  into 
common  stock  at  par  at  the  option  of  the  holder 
— a  common  form  of  convertibility.  So  long  as 
the  company's  earnings  on  its  stock  are  small, 
the  owner  of  the  bond  draws  his  regular  inter- 
est as  a  bondholder;  but  if  earnings  become 
large,  so  that  the  stock  sells  above  par,  he  can 
convert  his  bond  into  stock  and  thus  partici- 
pate in  the  profits  on  the  stock. 

A  fact  not  usually  mentioned  is  that  the 
existence  of  convertible  bonds  operates  against 
the  interests  of  the  stockholders,  for  the 
amount  of  stock  outstanding  is  automatically 
increased  when  the  earnings  become  large 
enough  to  carry  the  stock  above  the  conversion 
price.  The  possibilities  of  profit  on  the  stock 
are  cut  down  by  an  amount  equal  to  the  partici- 
pation of  the  bonds. 


OF  WALL  STREET  73 

It  is  evident,  then,  that  the  investor  cannot 
allow  himself  to  be  influenced  in  the  least  by 
the  name  of  any  security  that  may  be  offered 
to  him.  There  is  no  magic  in  the  word  "bond." 
It  is  necessary  to  go  further  and  find  what 
security  lies  behind  the  bond  and  what 
prior  liens  precede  the  bond  in  their  claim  on 
the  assets  or  on  the  specified  property  on  wrhich 
the  bond  is  based. 

The  Market  for  Bonds 

Nearly  all  railroad  bonds  are  listed  on  the 
Stock  Exchange  and  traded  in  on  the  floor. 
Many  other  bonds  of  which  large  amounts  are 
outstanding,  so  that  buying  and  selling  of  them 
is  frequent,  are  also  listed. 

Only  a  small  part  of  the  total  trade  in  bonds, 
however,  is  transacted  on  the  Exchange,  be- 
cause of  the  immense  multiplication  of  the 
number  of  issues.  Most  of  the  dealings  in 
bonds  proceed  "over  the  counter"  and  the  pro- 
portion of  the  bond  trade  on  the  Stock  Ex- 
change to  that  outside  is  growing  steadily 
smaller. 

The  "bond  house"  occupies  a  very  important 
position  in  the  Street.  When  an  issue  of  bonds 
is  contemplated  the  issuing  corporation  usually 


74  THE  MACHINERY 

seeks  the  assistance  of  one  or  more  of  the  lead- 
ing bond  houses  in  placing  the  bonds  among 
investors.  This  is  necessary  because  the  pri- 
vate investor  has  not  the  facilities  for  investi- 
gating the  assets  behind  the  bond  or  determin- 
ing its  value.  It  is  the  business  of  the  bond 
house  to  make  the  investigation  and  if  the  con- 
ditions under  which  the  bond  is  issued  are 
found  to  be  satisfactory  it  is  then  offered  to  the 
customers  of  the  house  at  what  is  considered 
to  be  a  fair  price. 

For  this  service  the  bond  house  makes  a 
profit  which  on  the  average  is  considerably  less 
than  it  would  cost  the  investor  to  investigate 
for  himself  to  say  nothing  of  the  fact  that  the 
investigation  is  likely  to  be  much  more  thor- 
ough and  dependable.  The  standing  of  the 
house  is  at  stake  with  every  bond  it  offers  to 
its  customers;  therefore  self-interest  requires 
every  effort  to  avoid  mistakes. 

Many  bond  houses  acquire  such  a  reputation 
for  care  and  conservatism  that  their  endorse- 
ment of  a  bond  guarantees  the  success  of  the 
issue.  Investors  know  that  the  house  would 
not  touch  the  bond  if  it  was  not  "all  right." 
In  that  way  the  well  managed  bond  house 


OF  WALL  STREET  75 

gets  a  following  which  gives  it  great  power  in 
the  Street. 

Some  banking  houses  take  the  most  extrava- 
gant precautions  before  endorsing  a  security. 
One  such  house  recently  called  in  an  expert 
and  asked  him  to  look  up  a  certain  bond.  He 
told  the  manager  that  the  bond  had  already 
been  investigated  by  a  well-known  authority 
and  the  report  was  available,  and  that  he 
doubted  whether  he  could  add  anything  to  it. 
The  manager,  however,  replied  that  he  already 
had  that  report  but  wanted  the  expert  to  make 
an  independent  investigation  and  confirm  it 
or  otherwise  as  the  facts  might  warrant. 

The  result  was  that  the  expert  went  to  the 
property  in  question  and  studied  it  as  though 
he  had  never  heard  of  it  before.  His  bill 
amounted  to  nearly  $2,000  and  yet  he  was  un- 
able to  add  anything  of  importance  to  the  facts 
previously  in  hand.  But  the  banking  house 
was  perfectly  satisfied. 

With  Accrued  Interest 

Bonds  are  commonly  quoted  at  a  certain 
price  "and  accrued  interest."  For  example,  a 
bond  quoted  at  par  would  really  be  worth  103 


76  THE  MACHINERY 

the  day  before  a  three  per  cent,  coupon  was 
payable.  If  the  coupon  was  semi-annual,  the 
bond  would  be  worth  about  101%  three  months 
before  the  date  of  payment,  and  so  on. 

The  prices  of  many  bonds  change  but  little. 
Hence  if  they  were  dealt  in  "flat,"  or  without 
regard  to  accrued  interest,  the  price  would 
gradually  crawl  up  from  one  interest  payment 
to  the  next,  when  the  interest  would  be  paid 
and  the  price  would  go  back  and  take  a  fresh 
start.  A  price  quoted  on  a  bond  at  any  time 
would  result  in  loss  of  the  interest  if  the  buyer 
took  up  the  offer  a  month  later. 

This  caused  so  many  complications  that  the 
custom  was  adopted  of  quoting  bonds  at  a 
certain  price  "and  accrued  interest."  A  six 
per  cent,  bond  quoted  at  par  and  interest  three 
months  after  the  date  the  last  coupon  was  due 
would,  for  example,  cost  the  buyer  about  101%. 

Bond  Yields. 

Another  complication  in  fixing  the  value  of 
a  bond  lies  in  the  fact  that  it  is  to  be  paid  off 
at  par  when  it  matures  although  it  may  in  the 
meantime  sell  considerably  above  or  below 
par. 


OF  WALL  STREET  77 

The  method  usually  adopted  assumes  that 
the  investor  will  reinvest  his  interest  aj:  the 
same  rate  as  the  yield  on  the  bond  and  elabor- 
ate tables  are  compiled  which  show  the  in- 
vestor just  what  his  actual  yield  will  be  on 
a  bond  at  any  rate  of  interest  and  due  in  any 
number  of  years.* 

This  method,  is  however,  open  to  some  ob- 
jections. It  assumes  that  an  investor  holding 
two  bonds  yielding  respectively  6  per  cent,  and 
4  per  cent,  will  reinvest  the  interest  from  the 
first  at  an  average  rate  of  6  per  cent,  and  the 
interest  from  the  second  at  4  per  cent.  This 
he  may  not  be  able  to  do. 

A  fairer  method  would  be  to  figure  the  inter- 
est rate  on  the  reinvested  sums  at  an  average 
normal  interest  rate  for  the  entire  period;  but 
what  is  such  an  average  interest  rate  and  how 
could  it  be  determined?  It  is  evident  that 


*  THE  MAGAZINE  OF  WALL,  STREET  also  publishes  a 
book  "Bond  Yields  at  a  Glance,"  consisting  of  seven  simple 
diagrams  which  show  the  yield  to  maturity  of  any  bond. 
This  plan  reduces  the  bond  tables  to  a  much  smaller  and 
more  convenient  form. 

there  is  no  such  thing  as  a  general  average 
interest  rate.  Interest  varies  according  to 
conditions — with  the  money  market  and  with 
the  character  of  the  investment.  We  could 


78  THE  MACHINERY 

not  even  find  an  average  interest  rate  for  past 
years,  to  say  nothing  of  estimating  it  for  the 
next  20  years. 

It  is  probable,  therefore,  that  the  customary 
method  is  as  good  as  any  that  would  be  prac- 
ticable. It  assumes  that  an  investor  hold- 
ing a  bond  yielding  6  per  cent,  will  be  likely  to 
seek  a  similar  investment  for  his  interest  pay- 
ments as  th6y  become  available,  and  that  the 
holder  of  a  bond  yielding  4  per  cent,  will  fol- 
low the  same  principle. 


CHAPTER  VII 

How  Business  Is  Done  on  the  Stock 
Exchange 

THE   wide   public   interest   in   the    Stock 
Exchange  really  began  with  the  twen- 
tieth    century.       The     business     boom 
which  began  in  1898  resulted  in  big  advances 
in  the  quotations  for  all  kinds  of  securities,  and 
the  rapid  growth  of  the  daily  press  and  of  the 
reading  public  brought  this  condition  to  the 
attention  of  millions  of  persons. 

There  is,  of  course,  no  way  of  knowing  how 
many  persons  are  actively  interested  in  the 
market  at  any  time.  The  number  varies 
greatly,  according  to  whether  or  not  condi- 
tions are  such  as  to  encourage  speculation. 
Certainly  not  less  than  100,000  persons  are  ac- 
tively interested  in  the  sense  of  being  fre- 
quent buyers  and  sellers,  and  it  is  very  prob- 
able that  the  number  is  much  greater. 

Listing 

Before  any  security  can  be  traded  in  on  the 
Stock  Exchange  it  must  be  "listed," — that  is, 

79 


80  THE  MACHINERY 

admitted  to  the  list  of  securities  dealt  in. 
Listing  does  not  imply  anything  as  to  the 
value  or  lack  of  value  of  the  security.  It 
simply  means  that  the  corporation  issuing  the 
security  is  legally  organized,  makes  reports  of 
its  income  and  expenditures  at  least  as  often 
as  once  a  year  and  issues  a  balance-sheet  show- 
ing its  condition  at  the  end  of  its  yearly  fiscal 
period.  The  public  must  judge  for  itself  what 
if  anything  the  security  is  worth.  The  Stock 
Exchange  confines  itself  to  furnishing  facilities 
for  buying  and  selling  the  security. 

The  Exchange  does  not,  and  in  the  nature 
of  the  case  could  not,  guarantee  the  correct- 
ness of  all  these  corporation  reports.  As  to 
that  also  the  public  must  form  its  own  judg- 
ment. 

Objects  of  the  Exchange 

The  constitution  of  the  Stock  Exchange 
says  that  "Its  objects  shall  be  to  furnish 
exchange  rooms  and  other  facilities  for  the 
convenient  transaction  of  their  business  by  its 
members  as  brokers;  to  maintain  high  stand- 
ards of  commercial  honor  and  integrity  among 
its  members;  and  to  promote  and  inculcate 


OF  WALL  STREET  81 

just  and  equitable  principles  of  trade  and  busi- 
ness." 

In  regard  to  the  first  of  these  objects  there 
is,  of  course,  no  difficulty.  The  second  has 
been  fairly  well  carried  out — better,  probably, 
than  in  any  other  line  of  organized  business — 
but  there  have  been  occasional  lapses.  With- 
out doubt  the  Exchange's  present  standards  of 
"commercial  honor  and  integrity"  are  higher 
than  ever  before.  In  fact,  one's  memory  needs 
to  run  back  only  a  decade  to  note  a  decided 
improvement  in  that  respect.  Just  what  the 
Exchange  does  toward  accomplishing  the  third 
object  it  would  be  difficult  to  say,  except  as 
the  third  is  included  in  the  second. 

Many  believe  that  the  Exchange  should  do 
more  than  it  now  does  toward  checking  riot- 
ous speculation  and  that  its  listing  require- 
ments should  be  more  stringent;  but  the 
authorities  have  always  taken  the  position  that 
the  Stock  Exchange  should  be  the  servant  of 
the  public,  not  its  tutor — that  its  business  is 
to  furnish  the  people  facilities  for  buying  and 
selling  legitimate  securities,  not  to  reform  the 
morals  of  corporations  or  to  guard  the  public 
against  its  own  follies. 


82  THE  MACHINERY 

Exchange  Members 

There  are  1,100  members  of  the  Stock  Ex- 
change.   These  comprise  the  following  classes : 

(1)  Capitalists,  whose  principal  reason  for 
holding  memberships  is  the  saving  of  commis- 
sions on  their  large  purchases  and  sales.    The 
annual  cost  of  holding  a  membership  is  over 
$3,000  a  year,  including  interest  and  dues.  This 
represents  the  commission  on  more  than  25,- 
000  shares  of  stocks  bought  or  sold,  hence  it  is 
only  large  operators  who  can  make  any  saving 
in  this  way. 

(2)  Brokers,  who  solicit  business  from  the 
public  and  hold  memberships  to  enable  them 
to  transact  it. 

(3)  Room  Traders,  who  buy  and  sell  only 
for  their  own  account.     Most  of  them  make 
their   profits   out   of    the    small    fluctuations,, 
standing  ready  to  buy  a  little  below  the  cur- 
rent market  or  to  sell  a  little  above.     On  the 
Chicago  Board  of  Trade  they  are  called  "scal- 
pers" and  the  nickname  fairly  well  expresses 
the  nature  of  their  business. 

(4)  Specialists,   who   make   a   specialty   of 
dealing  in  one  or  more  securities.    Their  gen- 


OF  WALL  STREET  83 

eral  method  of  business  is  similar  to  that  of 
the  room  traders.  This  is  the  department  of 
the  business  in  which  there  is  greatest  oppor- 
tunity for  dishonesty.  Active  brokers  leave 
with  the  specialist  their  orders  to  buy  and  sell 
the  particular  stock  in  which  he  is  working, 
and  he  also  buys  and  sells  for  his  own  account. 
It  is  obvious  that  it  would  be  possible  for  him 
to  "cheat"  in  the  handling  of  these  orders. 

As  a  matter  of  fact,  however,  the  Stock  Ex- 
change specialist  soon  finds  that  honorable 
dealing  pays  him  best — not  to  credit  him  with 
any  higher  motive,  which,  of  course,  often 
exists.  The  specialists  are  a  necessary  part  of 
the  machinery  of  the  Street  and  generally 
speaking  they  handle  their  part  of  the  business 
fairly,  though  not  always  to  the  complete  satis- 
faction of  brokers  and  their  customers. 

(5)  Two-Dollar  Brokers,  who  execute  orders 
for  other  brokers  at  the  established  rate  ofi 
$2.00  a  hundred  shares.  There  are  two  or 
three  hundred  of  these,  and  they  are  always 
ready  to  handle  business  for  brokerage  houses 
dealing  direct  with  the  public  in  case  the  regu- 
lar representative  of  the  house  has  not  the  time 
to  take  care  of  all  his  orders. 


84  THE  MACHINERY 

(6)  Odd  Lot  Dealers,  who  stand  ready  to 
buy  or  sell  lots  of  less  than  100  shares.  Their 
business  is  about  like  that  of  the  room  traders, 
except  that  they  do  not  deal  in  100  share  lots 
except  for  the  purpose  of  evening  up  their  pur- 
chases and  sales  in  odd  lots. 

These  dealers  have  a  standing  agreement  as 
to  the  terms  on  which  they  will  buy  or  sell 
odd  lots.  The  market  for  any  stock  never  con- 
sists of  a  single  quotation,  but  of  a  bid  price 
and  an  asked  price.  This  is  equally  true 
whether  the  trade  to  be  executed  is  for  100 
shares  or  for  an  odd  lot.  An  order  for  100 
shares  coming  through  a  brokerage  house  can 
be  bought  at  the  offered  price  or  sold  at  the 
bid  price.  These  prices  are  usually  l/%  or  % 
apart. 

The  odd  lot  dealer,  therefore,  buys  or  sells 
on  the  same  terms — he  will  buy  at  the  bid 
price  or  sell  at  the  asked  price.  The  only  im- 
portant way  in  which  he  differs  from  many 
other  room  traders  is  that  he  deals  only  in 
odd  lots. 

The  odd  lot  dealer,  however,  does  one  thing 
that  the  other  room  traders  do  not  do — he  will 
buy  l/%  below  or  sell  l/&  above  the  next  quota- 


OF  WALL  STREET  85 

tion  after  the  order  reaches  him.  Thus  it  often 
happens,  in  an  inactive  security,  that  the  odd 
lot  customers  may  actually  get  a  better  execu- 
tion than  if  his  order  had  been  for  100 
shares. 

In  this  matter  a  good  deal  of  confusion 
arises  from  the  fact  that  the  execution  of  a 
100  share  order  is  quoted  on  the  tape,  while  the 
odd  lot  trade  is  not  quoted.  The  100  share 
order  is  certain  to  be  executed  at  the  apparent 
market  because  it  creates  the  market,  but  the 
odd  lot  execution  may  appear  to  be  a  fraction 
away  from  the  market,  even  though  a  100  share 
order  executed  at  the  same  moment  would 
have  been  at  exactly  the  same  price  as  the 
odd  lot  execution.  For  this  reason  the  odd 
lot  customer  usually  believes  that  he  gets  an 
execution  about  ^  "against  him."  Taking 
the  average  of  all  odd  lot  orders  and  all  100 
share  orders  for  any  day,  it  is  a  question 
whether  any  difference  worth  mentioning 
could  be  discovered  in  favor  of  the  100  share 
trader.  If  so,  the  average  difference  would 
certainly  not  be  more  than  1-16. 

"Seats"  on  the  Exchange  vary  in  market 
value  according  to  the  amount  of  business 


86  THE  MACHINERY 

being  done.  The  term  is  now  out  of  date,  as 
members  have  no  regular  seats,  nor,  as  a  rule, 
time  to  sit  in  them  if  they  had  them.  The 
word  "membership"  is  often  used  instead.  In 
1871  seats  sold  as  low  as  $2,750,  and  in  1909  at 
$96,000.  The  value  of  seats  always  advances 
in  a  bull  market  and  falls  in  a  bear  market,  in- 
fluenced by  the  degree  of  public  speculation 
and  the  necessities  of  members. 

The  Exchange  has  always  been  strict  about 
admitting  applicants  to  membership,  insisting 
upon  an  honorable  record  and  a  good  business 
reputation.  Some  of  the  men  who  have  helped 
make  Stock  Exchange  history  by  their  big 
operations  were  never  members  and  could  not 
have  gained  admittance.  Members  are  sus^ 
pended  or  expelled  for  infraction  of  the  rules 
or  for  dishonorable  conduct  in  business  mat- 
ters. There  is  a  Committee  on  Business  Con- 
duct to  watch  over  these  things. 

How  Business  Is  Handled. 

The  Exchange  opens  at  9 :30,  trading  begins 
at  10  and  closes  at  3,  after  which  hour  the 
"money  crowd"  gathers  for  the  borrowing  and 
lending  of  the  money  needed  to  carry  securi- 
ties. 


OF  WALL  STREET  87 

Scattered  about  the  room  are  posts  bearing 
the  names  of  different  securities,  and  those 

Those  who  wish  to  buy  bid  for  "100  at 
respective  posts.  Some  have  orders  from  cus- 
tomers or  other  brokers  at  fixed  prices  or  at 
"the  market,"  others  are  ready  to  trade  for 
their  own  account. 

Those  who  wish  to  buy,  bid  for  "100  at 
7Sy2,"  "500  at  78^,"  etc.  Those  wishing  to 
sell  offer  "200  at  79,"  "100  at  78^,"  and  so  on. 
As  soon  as  a  trade  is  agreed  upon  a  waiting 
messenger  takes  a  memorandum  of  it  to  the 
representative  of  the  ticker  company  on  the 
floor  and  the  quotation  is  sent  out  over  the 
tickers  to  hundreds  of  brokerage  houses  and 
private  individuals  and  is  posted  on  the  Stock 
Exchange  board.  Each  post  also  has  an  indi- 
cator showing  the  lost  quotation  made. 

Each  broker  makes  a  memorandum  of  his 
transactions  and  with  whom  made.  In  very 
active  markets  as  soon  as  he  has  leisure  after 
executing  a  number  of  orders,  he  seeks  out  the 
other  party  to  the  transaction  and  checks  the 
item.  Tn  case  of  a  misunderstanding  a  com- 
promise is  necessary,  but  this  rarely  occurs. 


88  THE  MACHINERY 

This  personal  comparison  on  the  floor  is 
often  neglected,  but  the  broker  or  house  mak- 
ing a  sale  is  required  by  the  rules  to  compare 
the  transaction  at  the  office  of  the  buyer  not 
later  than  one  hour  after  the  close  of  the  Ex- 
change. This  comparison  is  effected  by  an 
exchange  of  memorandum  slips. 

Each  broker  has  a  number,  and  when  he  is 
wanted  at  the  door  or  at  the  rail,  his  number 
is  flashed  on  the  electric  annunciator  which 
occupies  one  side  of  the  room.  The  lights 
behind  these  numbers  are  of  different  colors, 
signifying  where  the  broker  is  wanted. 

Sales  may  be  made  for  "cash,"  which  means 
for  delivery  on  the  day  of  sale ;  "regular,"  for 
delivery  on  the  next  business  day;  "three 
days,"  for  delivery  on  the  third  business  day, 
or  on  "buyer's  and  seller's  options,"  which 
may  run  not  less  than  four  nor  more  than  60 
days.  Sales  are  often  made  "seller  30"  or 
"seller  60"  when  the  securities  sold  are  not  in 
New  York,  but  are  to  come  from  another  city 
or  from  abroad. 

Brokers'  deliveries  of  stock  certificates  sold 
must  be  made  before  2:15  of  the  same  day  if 
"cash"  or  of  the  next  day  if  "regular."  When 


OF  WALL  STREET  89 

the  books  of  a  corporation  close  for  the  pay- 
ment of  a  dividend,  the  stock  sells  "ex-divi- 
dend" on  the  Exchange — that  is,  the  amount 
of  the  dividend  is  deducted  from  the  price 
of  the  stock.  The  dividend  check  goes  to  the 
holder  of  record  of  the  stock  certificate,  but  if 
the  certificate  has  been  endorsed  in  blank  and 
sold  to  someone  else,  the  brokers  who  have 
handled  the  transactions  pass  the  dividend 
check  along  and  it  is  credited  to  the  present 
owner  of  the  stock  on  the  books  of  the  broker- 
age house  which  is  carrying  the  stock  for  him. 


CHAPTER  VIII 

How  Business  Is  Done  on  the  Stock 
Exchange  (Continued) 

MOST  of  the  methods  of  the  Exchange 
are  readily  understood — in  fact,  they 
are  little  more  than  the  most  obviously 
convenient  way  of  handling  the  purchase  and 
sale  of  securities.     There  are,  however,  some 
parts  of  the  necessary  machinery  that  the  pub- 
lic does  not  easily  grasp.     Among  these  are 
short  sales,  the  borrowing  and  lending  of  stock 
certificates  and  the  Stock  Exchange  Clearing- 
House. 

Short  Sales 

The  whole  world  is  accustomed  to  sales  of 
all  sorts  of  goods  for  delivery  some  time  in  the 
future ;  yet  when  sales  of  stocks,  grain  or  cot- 
ton are  made  in  this  way  on  an  exchange,  they 
are  often  stigmatized  as  a  form  of  gambling. 
The  very  farmer  who  sells  his  own  crop  of 
standing  wheat  for  delivery  after  it  is  har- 
vested and  threshed  wil  often  be  heard  criti- 
90 


THE  MACHINERY  OF  WALL  STREET     91 

cising  the  practice  of  short-selling  on  the  Chi- 
cago Board  of  Trade. 

On  the  grain  and  cotton  exchanges  and  the 
London  Stock  Exchange  short-selling  consists 
simply  in  the  sale  of  contracts  for  the  future 
delivery  of  the  goods.  It  is  the  failure  to 
grasp  this  idea  that  causes  much  confusion  of 
mind  on  this  subject.  The  short-seller  of  grain, 
cotton,  or  of  stocks,  in  London,  does  not  really 
sell  those  articles  himself — he  sells  a  contract 
for  the  delivery  of  the  articles  some  time  in 
the  future.  All  the  business  is  handled  through 
responsible  brokers,  who  make  the  contracts  in 
their  own  names.  Hence  the  contracts  can  be 
passed  from  hand  to  hand  among  the  brokers 
just  about  as  readily  as  so  many  dollar  bills, 
and  may  be  sold  and  resold  any  number  of 
times. 

For  example,  if  you  wish  to  sell  short  5,000 
bushels  of  May  wheat,  at  90  cents  a  bushel, 
you  say,  in  effect,  to  your  broker: 

"I  agree  to  furnish  you,  on  or  before  the 
end  of  May,  an  acceptable  contract  for  the  de- 
livery of  5,000  May  wheat  of  standard  quality 
at  90  cents.  I  believe  I  can  buy  such  a  con- 
tract from  somebody  else  before  that  date  for 


92  THE  MACHINERY 

less  than  90  cents  a  bushel.  If  not,  of  course, 
I  shall  have  to  pay  more;  but  in  any  event  I 
will  protect  my  agreement." 

For  your  agreement  the  broker  substitutes 
his  own — since  you  are  not  known  on  the  Ex- 
change— and  sells  it  at  90  cents  in  the  open 
market.  You  protect  him  by  a  reasonable  de- 
posit of  cash  in  his  hands. 

Short  sales  of  stocks  may  be  and  sometimes 
are  made  on  the  New  York  Stock  Exchange  in 
exactly  the  same  way,  but  the  customary 
method  is  a  slight  variation  of  the  above.  In- 
stead of  delivering  to  the  buyer  a  contract  for 
the  future  delivery  of  the  stock,  your  broker 
borrows  the  stock  certificate  from  someone  who 
has  it  on  hand  and  delivers  the  certificate  itself. 
The  effect  is  substantially  the  same.  Sooner 
or  later  you  have  to  furnish  your  broker,  in 
some  way,  \vith  a  certificate  to  be  returned  to 
the  person  from  whom  the  broker  has  bor- 
rowed one.  If  you  have  the  certificate — in 
your  safe  deposit  box,  or  perhaps  in  another 
city — you  get  it  at  your  leisure  and  turn  it 
over  to  your  broker.  If  you  haven't  the  neces- 
sary certificate,  then  you  will  eventually  have 
to  instruct  your  broker  to  buy  one  for  you  in 


OF  WALL  STREET  93 

the  market- — in  other  words,  you  "cover"  your 
short  sale  by  buying  a  certificate  on  the  Ex- 
change, which  your  broker  can  then  return  in 
place  of  the  one  he  borrowed  to  sell  for 
you. 

So  far  as  you  are  concerned,  this  is  a  sale 
for  future  delivery.  The  only  difference  is  in 
the  system  by  which  the  broker  handles  it. 
Your  broker,  having  your  agreement  to  supply 
the  stock  whenever  he  wants  it,  is  safe  in  not 
only  selling  the  stock,  but  in  borrowing  it  from 
someone  else  and  delivering  it  to  the  buyer. 
You  are  saf^e  in  entering  into  the  agreement, 
for  even  though  you  may  not  have  the  stock 
yourself  you  know  that  you  could  at  any  time 
arrange  with  some  other  broker  to  supply  it  to 
your  original  broker  in  case  he  should  want 
it,  which  rarely  occurs.  And  in  the  end  you 
close  the  whole  deal  by  instructing  your  broker 
to  buy  the  certificate  in  the  market  to  fill  your 
short  sale,  at  a  lower  or  higher  price,  accord- 
ing as  your  judgment  has  been  correct  or  in- 
correct. 

As  to  the  usefulness  of  short-selling  there 
can  be  no  doubt.  In  order  that  the  price  of  a 
stock  may  be  kept  as  nearly  as  possible  at  its 


94  THE  MACHINERY 

true  value,  it  should  be  possible  for  anybody 
to  buy  at  a  price  below  what  he  believes  to  be 
a  just  valuation  or  to  sell  at  a  price  above  that 
valuation.  Without  short-selling  he  could  buy 
at  any  time,  but  he  could  not  sell  unless  he 
happened  to  have  the  stock  on  hand.  The 
result  would  be  a  one-sided  market,  such  as  is 
seen  now  in  many  stocks  which  are  so  scarce 
that  it  is  impossible  to  borrow  them  for  the 
purpose  of  short  sales.  And,  of  course,  any 
amount  of  short-selling  makes  no  permanent 
difference  in  the  demand  and  supply. 

Borrowing  and  Lending  Stocks. 

Since  there  are  always  some  people  short 
of  most  of  the  active  stocks,  a  great  many  cer- 
tificates have  to  be  borrowed  every  day  by  the 
various  brokers.  There  is  usually  no  difficulty 
about  this.  The  broker  who  has  a  lot  of  stock 
certificates  in  his  vault  takes  no  particular 
satisfaction  in  seeing  them  there.  On  the  con- 
trary, he  usually  puts  them  up  with  his  bank 
and  borrows  as  much  money  on  them  as  he 
can,  which  is  perhaps  70  per  cent,  of  their 
market  value,  and  he  pays  the  current  rate  of 
interest  for  the  use  of  the  money.  If  another 


OF  WALL  STREET  95 

broker  wants  to  borrow  some  of  them,  broker 
No.  1  says: 

"All  right,  I  will  put  them  up  with  you  in- 
stead of  with  the  bank,  if  you  will  lend  me 
their  full  market  value  at  the  same  rate  of 
interest." 

There  are  generally  plenty  of  stock  certifi- 
cates in  Wall  Street,  but  to  borrow  money  it 
is  necessary  to  pay  interest;  hence  it  is  the 
lender  of  stocks  that  pays  interest  to  the  bor- 
rower on  their  money  value,  which  is  just  the 
opposite  from  what  the  novice  usually  sup- 
poses. What  borrowing  stocks  really  means 
is  lending  money  on  the  stocks  as  security  up 
to  their  full  market  value.  No  one  would  be 
willing  to  do  that  except  the  broker  who  wants 
the  certificates  to  fill  some  of  his  short  sales. 

In  this  way  a  regular  loan  market  arises 
for  the  borrowing  and  lending  of  stock  certifi- 
cates, and  the  rate  of  interest  allowed  on  the 
money  value  of  the  stocks  may  be  quoted  dif- 
ferently for  different  issues,  according  as  those 
particular  certificates  are  scarce  or  plentiful 
in  the  Street.  If  the  certificates  of  a  stock  are 
plentiful,  the  loan  rate  on  that  stock  will  usu- 
ally be  the  same  as  for  call  money,  but  if  they 


96  THE  MACHINERY 

are  scarce  the  interest  rate  may  be  lower  than 
the  call  money  rate,  or  they  may  loan  "flat"- 
that  is,  no  interest  at  all  is  paid  on  the  money 
which  is  loaned  on  the  stocks  as  security — or 
even  at  a  premium,  which  means  that  the  usual 
order  of  things  is  reversed  and  the  borrower  of 
the  stocks  is  obliged  to  pay  something  to  get 
them. 

All  these  details  the  broker  handles,  so  that 
the  process  of  short-selling  so  far  as  the  cus- 
tomer is  concerned  is  just  as  simple  as  that  of 
trading  on  the  long  side.  On  the  long  side  the 
customer  buys  first  and  sells  later;  on  the 
short  side  he  simply  reverses  the  operation, 
selling  first  and  buying  later. 

Nevertheless  the  public  does  very  little 
short-selling.  To  most  people  it  seems  mys- 
terious and  they  are  a  little  afraid  of  it.  If 
the  market  goes  against  them  on  the  short  side 
they  are  disturbed,  while  on  the  long  side  they 
are  not  much  worried.  "There  is  a  bottom 
but  no  top,"  they  sometimes  say — which  may 
be  true  theoretically,  but  not  in  actual  practice. 
Also,  the  great  majority  of  people  are  tempera- 
mental bulls  and  prefer  to  work  on  the  bull 
side  for  that  reason. 


OF  WALL  STREET  97 

Professional  and  semi-professional  traders 
operate  just  as  freely  on  the  short  side  as  on 
the  long  and  it  would  probably  be  a  good  thing 
for  the  market  and  for  the  public  interest  if 
the  public  could  do  the  same;  but  that  would 
require  far  more  intellectual  acuteness  and  de- 
tachment than  the  majority  of  persons  are  like- 
ly to  attain. 

Stock  Exchange  Clearing-House 

Formerly  every  stock  certificate  sold  was 
delivered  by  messenger,  in  exchange  for  a 
check  for  the  value  of  the  stock.  This  made 
a  great  deal  of  unnecessary  work,  but  it  was 
the  tremendous  value  of  checks  that  had  to  be 
issued  every  day  that  really  compelled  a 
change  in  methods.  In  1892  the  banks  rebelled 
against  issuing  so  many  checks,  a  practice  only 
rendered  possible  by  extensive  over-certifica- 
tion and  the  Exchange  adopted  the  Clearing- 
House  method,  which  had  long  been  success- 
fully used  in  Philadelphia,  Boston  and  Chi- 
cago. This  is  an  adaptation  of  the  bank  clear- 
ing-house system  to  the  trade  in  stocks. 

For  example,  Broker  A  has  sold  B  100  Read- 
ing for  $75,000;  B  has  sold  100  to  C  for  $74,- 


98  THE  MACHINERY 

000;  C  has  sold  100  to  D  for  $74,500;  and  D 
has  sold  100  to  A  for  $75,250.  There  is  evi- 
dently no  reason  why  four  different  deliveries 
of  100  Reading  should  be  made,  accompanied 
by  the  issue  of  four  checks  for  the  full  value 
of  the  stock  in  each  case.  The  stock  is  back 
where  it  started  from  and  all  that  is  necessary 
is  the  issue  of  small  checks  to  cover  the  differ- 
ences in  value.  If  the  100  Reading,  instead  of 
getting  back  to  A  had  gone  to  E,  it  would  only 
have  been  necessary  to  make  one  delivery  of 
the  stock,  from  A  to  E. 

Extend  this  example  over  a  large  list  of 
active  stocks  and  you  have  the  Stock  Ex- 
change Clearing-House.  A  force  of  clerks  is 
employed  and  the  system  has  been  carefully 
worked  out  and  improved  by  experience.  Each 
broker  sends  in  his  clearance  sheet  and  every 
trade  is  represented  by  a  ticket.  The  tickets 
are  distributed  in  boxes  like  mail  in  a  post- 
office.  Then  all  trades  in  each  stock  are  listed 
on  a  sheet  and  examination  shows  what  trades, 
will  balance  each  other  and  what  deliveries 
will  be  necessary.  On  the  following  morning 
the  various  brokers  are  notified  what  deliveries 
they  must  make. 


OF  WALL  STREET  99 

Loans  of  stocks,  as  explained  above  under 
short-selling,  appear  on  the  clearance  sheets 
as  sales,  since  the  lender  receives  their  full 
value  just  the  same  as  though  he  had  sold 
them.  On  the  side  of  the  borrower  the  trans- 
action goes  through  the  Clearing-House  as  a 
purchase. 

The  Clearing-House  is  surrounded  by  as 
much  secrecy  as  possible  so  that  information 
in  regard  to  important  purchases  and  sales  may 
not  leak  out.  Pratt,  in  The  Work  of  Wall 
Street,  gives  the  number  of  shares  cleared  in 
1901  as  926,347,300,  having  a  value  of  $77,- 
853,500,000,  and  the  number  of  share  balances, 
which  had  to  be  delivered,  as  134,395,000,  hav- 
ing a  value  of  $10,930,853,600.  The  great  sav- 
ing resulting  from  the  system  is  obvious. 

The  number  of  shares  traded  in  on  the  Ex- 
change in  1901  was  265,944,659,  while  the  num- 
ber going  through  the  Clearing-House  was 
926,347,300 — a  point  which  mystifies  many 
even  among  those  who  consider  themselves 
well  informed  on  the  methods  of  the  Street. 
Since  each  trade  is  cleared  by  both  the  buyer 
and  the  seller,  that  makes  the  clearance  double 
the  shares  traded  in ;  and  the  remainder  of  the 


100  THE  MACHINERY 

excess  is  accounted  for  by  the  borrowing  and 
lending  of  stocks,  which  as  we  have  seen  go 
through  the  Clearing-House  just  like  purchases 
and  sales. 

The  Consolidated  Stock  Exchange. 

Some  of  the  methods  used  on  the  Consoli- 
dated differ  a  little  from  those  of  the  New 
York  Stock  Exchange.  This  organization  re- 
sulted from  the  consolidation  of  a  mining  and 
an  oil  exchange,  hence  its  name.  In  the  70's 
and  80's  there  was  a  big  speculation  on  it  in 
this  class  of  securities,  and  when  that  died 
out  the  exchange  took  up  trading  in  the  same 
stocks  listed  on  the  New  York  Stock  Ex- 
change, i 

The  quotations  made  on  the  bigger  exchange 
are  posted  on  the  Consolidated  and  are  the 
basis  for  trading  there.  Naturally  this  is  not 
pleasing  to  the  New  York  Stock  Exchange, 
but  the  smaller  institution  has  succeeded  in 
making  a  place  for  itself  and  at  present  the 
business  on  it  is  about  one-tenth  that  of  the 
big  exchange.  It  is,  however,  differently  dis- 
tributed. The  business  in  some  of  the  estab- 
lished speculative  favorites,  like  U.  S.  Steel, 


OF  WALL  STREET  101 

Anaconda,  Smelting,  or  Reading,  is  usually 
more  than  one-tenth  that  of  the  primary  mar- 
ket, while  some  of  the  inactive  issues  are  rarely 
dealt  in. 

Most  of  the  business  is  in  lots  of  less  than 
50  shares.  Settlements  are  made  weekly  in- 
stead of  daily,  so  that  the  customer  who  closes 
his  trade  in  the  same  week  it  is  made  escapes 
the  payment  of  interest.  The  market  for  odd 
lots  of  the  active  stocks  is  about  the  same 
as  on  the  big  exchange,  but  for  larger  quanti- 
ties or  in  the  less  active  stocks  execution  is 
sometimes  erratic,  owing  to  the  relative  nar- 
rowness of  the  market. 

Government  of  the  Exchange. 

The  final  authority  on  the  New  York  Stock 
Exchange  is  the  Governing  Committee,  which 
consists  of  a  president  and  a  treasurer  elected 
annually  and  40  members,  10  of  whom  are 
chosen  each  year.  The  governors  are  divided 
into  various  sub-committees — on  arrange- 
ments, admissions,  arbitration,  commissions, 
constitution,  finance,  law,  the  stock  list,  the 
Clearing-House,  etc. 

In  1913,  by  an  amendment  to  the  Constitu- 


102  THE  MACHINERY 

tion,  a  committee  on  Business  Conduct  was 
created  "to  keep  in  touch  with  the  course  of 
prices  listed  on  the  Exchange,  with  the  view 
of  determining  when  improper  transactions  are 
being  resorted  to,"  and  having  the  power  "to 
examine  into  the  dealings  of  any  members, 
\vith  respect  to  the  above  subjects."  This  is 
one  of  the  steps  taken  in  recent  years  to  raise 
the  standards  of  the  business.  One  object  of 
this  committee  is  to  prevent  the  execution  of 
"matched  orders,"  a  subject  which  will  be  dis- 
cussed in  another  chapter. 


CHAPTER  IX 

Inside  the  Broker's  Office 

STOCK  brokerage  as  a  business  origniated 
in  England  in  the  latter  part  of  the  seven- 
teenth century,  when  the  East  India  Com- 
pany attracted  a  great  deal  of  public  attention. 
In  the  United  States  the  business  can  scarcely 
be  identified  before  1790,  although  there  were 
doubtless  many  individual  cases  before  that  date 
in  which  one  person  acted  for  another  in  the 
purchase  or  sale  of  stocks. 

Before  a  sale  of  stock  can  be  consummated 
the  seller  must  find  a  buyer  or  the  buyer  find 
a  seller.  It  would  usually  be  a  long  and  trouble- 
some job  for  the  buyer  or  seller  to  do  this 
personally,  so  the  work  is  turned  over  to  some 
agent  who  is  already  in  touch  with  many  buyers 
and  sellers.  This  agent  is  the  broker,  and  for 
convenience  the  brokers  have  an  exchange  where 
they  meet  to  compare  buying  and  selling  orders 
and  adjust  prices.  Thus  the  Stock  Exchange. 

Each  broker  must  have  his  place  of  business. 
A  small  broker,  who  does  business  principally 
for  himself  and  for  a  few  clients,  may  need  only 
103 


104  THE  MACHINERY 

deskroom,  arranging  with  another  broker,  who 
has  all  the  necessary  machinery,  to  "clear"  his 
transactions  for  him.  But  the  active  broker  has 
to  surround  himself  with  clerks  and  bookkeepers 
and  provide  facilities  for  his  customers  to  watch 
the  market  and  place  their  orders  promptly. 
This  is  the  brokerage  house  as  the  public  knows 
it. 

Such  a  house  has  one  or  more  members  on 
the  floor  ot  the  Exchange,  to  whom  orders  are 
telephoned  and  from  whom  reports  of  execu- 
tions of  the  orders  are  received.  It  has  one  or 
more  office  partners,  who  oversee  the  work  of 
the  office  and  consult  with  customers.  It  has 
a  "cage,"  containing  the  order  clerk,  cashier, 
margin  clerk,  delivery  clerk,  bookkeepers,  etc. 
It  has  messenger  boys  to  deliver  stock  certifi- 
cates and  checks  to  other  brokers  as  may  be 
necessary. 

Most  such  houses  provide  a  "customers'  room" 
where  quotations  from  all  exchanges  of  which 
the  house  is  a  member  are  posted  on  a  black- 
board as  fast  as  they  come  out  on  the  tickers, 
and  the  principal  newspapers  and  news  services 
are  kept  on  file.  Some  houses,  however,  even 
though  doing  a  large  business,  do  not  like  the 
customers'  room  and  abolish  it,  doing  business 


OF  WALL  STREET  105 

with  their  clients  over  the  telephone,  telegraph, 
by  letter,  or  by  personal  consultation.  This  is 
because  an  open  customers'  room  is  apt  to  attract 
a  great  many  "chair  warmers,"  who  do  very 
little  business  but  make  a  nuisance  of  themselves 
by  foolish  conversation.  Such  traders  may  repel 
a  better  class  of  business  men,  and  yet  it  is  a 
disagreeable  task  to  invite  them  to  take  their 
account  elsewhere.  Brokers  are  always  glad  to 
have  strangers  drop  into  their  offices  to  glance 
over  the  market,  but  they  naturally  object  to 
having  their  customers'  rooms  turned  into  loung- 
ing places  for  idlers. 

The  most  important  part  of  a  broker's  busi- 
ness usually  comes  in  over  the  telephone  and 
telegraph,  although  many  mail  orders  are  also 
received  from  out  of  town.  Novices  are  some- 
times surprised  that  the  broker  is  willing  to  ac- 
cept orders  by  telephone  since  this  evidently 
gives  a  dishonest  client  the  opportunity  to  repu- 
diate the  order  if  the  market  goes  against  him,  by 
asserting  that  the  order  was  misunderstood.  But 
the  average  broker  is  a  good  judge  of  human 
nature  and  rarely  permits  a  customer  to  get 
on  his  books  who  would  be  capable  of  such 
trickery. 


106  THE  MACHINERY 

The  Handling  of  Orders 

An  account  is  opened  with  a  broker  by  the 
depositing  of  a  check.  Theoretically  some  sort 
of  introduction  is  supposed  to  be  required,  but 
a  fair-sized  check  is  usually  a  good  introduc- 
tion— although  if  the  check  was  from  an  un- 
known person  the  broker  might  naturally  wish 
to  collect  it  before  executing  orders. 

In  this  way  the  broker  acts  in  the  double 
capacity  of  banker  or  "pledgee,"  and  agent  in  the 
execution  of  orders.  Formerly  many  houses 
called  themselves  "Bankers  and  Brokers"  in 
recognition  of  this  double  function,  but  that  term 
became  so  widely  used  by  bucketshops  and  non- 
members  of  the  exchanges  that  it  has  been  prac- 
tically dropped  by  the  better  class  of  brokers. 

The  account  having  been  opened,  the  customer 
is  free  to  place  orders.  The  house  will,  in  nearly 
all  cases,  suggest  suitable  investments  if  desired, 
but  in  doing  this,  the  broker  accepts  no  respon- 
sibility. He  merely  gives  his  client  the  benefit 
of  his  judgment  without  in  any  sense  guarantee- 
ing it  to  be  correct. 

It  is  to  be  regretted  that  the  broker  is  not 
usually  as  ready  to  tell  his  customer  when  to 


OF  WALL  STREET  107 

sell  as  when  to  buy.  He.  nearly  always  leaves 
the  customer  to  select  his  own  point  for  taking 
a  profit  or  a  loss,  as  the  case  may  be.  The 
principal  reason  for  this  is  that  the  customer 
is  usually  much  disgusted  if  his  stock  advances 
further  after  the  broker  has  recommended  that 
he  take  profits.  That  is  unreasonable  but  it 
seems  to  De  human  nature.  Also,  the  broker 
seems  to  feel  that  he  has  done  all  that  can  be 
expected  of  him  if  he  has  recommended  a  pur- 
chase that  turns  out  well.  So  long  as  the  cus- 
tomer has  a  profit  in  his  open  trade,  the  broker 
sees  nothing  to  worry  about. 

This  is  unquestionably  a  wrong  viewpoint. 
The  proper  closing  of  a  trade  is  just  as  impor- 
tant as  the  making  of  it,  and  it  is  all  the  more 
necessary  that  the  broker  should  watch  this  end 
of  the  transaction  because  the  average  customer 
is  much  more  ready  to  buy  than  to  sell. 

The  number  of  shares  of  any  stock  that  the 
broker  will  be  willing  to  buy  or  sell  for  the 
customer  on  his  deposit  depends  entirely  on  the 
character  of  the  stock  selected.  On  many  active 
stocks,  having  a  good  market,  the  broker  will  f 
be  satisfied  with  a  deposit  of  $10  a  share — though 
he  will  generally  recommend  that  a  larger  margin 


108  THE  MACHINERY 

be  carried.  On  other  stocks,  $20,  $30  or  $50 
may  be  necessary  to  protect  the  broker  from  a 
possible  loss,  and  still  others  he  will  not  buy 
unless  they  are  paid  for  in  full. 

If  the  customer's  deposit  is  equal  to  $10  a 
share  on  the  stock  bought,  a  decline  of  ten 
"points"  will  evidently  exhaust  the  deposit  or 
margin  and  the  customer  must  then  either  de- 
posit more  margin  or  sell  the  stock.  Inexperi- 
enced traders  often  think  that  the  broker  might 
"carry"  them  a  little  below  this  "exhaust  point," 
but  the  broker  who  attempts  to  do  it  is  headed 
for  certain  financial  ruin  and  is  unsafe  to  do 
business  with.  There  is  only  one  safe  way  to 
handle  a  brokerage  business  and  that  is  on  a 
strictly  cash  basis. 

Margins 

The  broker  will  always  "call"  his  customer 
for  more  margin  when  the  price  of  the  stocks 
held  begins  to  approach  the  limits  of  the  cus- 
tomer's deposit — in  fact,  he  is  required  by  law 
to  do  that.  If  the  customer  does  not  respond 
or  if,  in  a  very  active  market,  he  cannot  be 
reached  in  time,  the  broker  has  the  right  to 
protect  himself  by  closing  out  the  trade;  and 


OF  WALL  STREET  109 

to  cover  any  possible  legal  complications  on  this 
point,  the  broker  usually  prints  somewhere  on 
his  stationery  the  statement  that  all  orders  will 
be  executed  in  accordance  with  customs  of  the 
New  York  Stock  Exchange,  or  he  may  be  even 
more  explicit  and  say  that  he  reserves  the  right 
to  close  trades  without  notice  when  margins  are 
running  out.  The  safe  plan,  of  course,  is  for 
the  customer  to  keep  in  his  broker's  hands  ample 
funds  to  cover  all  contingencies. 

The  customer  is  the  legal  owner  of  all  stocks 
he  buys.  The  broker  acts  as  his  agent.  If  the 
broker  faithfully  carries  out  his  customer's  in- 
structions, with  such  a  degree  of  care  and  skill 
as  may  reasonably  be  expected  of  any  expert 
and  reliable  broker,  and  in  accordance  with  the 
customs  of  the  exchange  on  which  the  order  is 
executed,  he  has  acquitted  himself  of  all  further 
responsibility.  The  result  is  "up  to"  the  cus- 
tomer. 

When  the  customer  deposits  only  a  part  of 
the  value  of  stocks  bought,  the  broker  lends 
him  the  rest.  Then  the  broker,'  as  a  rule,  takes 
the  stock  certificates  to  his  bank  and  borrows 
as  much  as  he  can  on  them.  Thus  if  the  stock 
is  bought  for  $80  a  share,  the  customer's  de- 


110  THE  MACHINERY 

posit  may  represent  $10  of  that,  the  broker  may 
lend  him  another  $10  a  share,  and  the  broker 
may  borrow  from  his  bank  on  the  certificate  as 
security  the  remaining  $60,  which  in  turn  he  also 
lends  to  the  customer. 

This  is  called  rehypothecation.  The  customer 
hypothecates  his  stock  with  the  broker  and  the 
broker  rehypothecates  it  to  the  bank.  A  recent 
New  York  law  requires  that  the  broker  shall  not 
rehypothecate  to  the  bank  for  more  than  the 
amount  owed  on  the  stock  by  the  customer  unless 
by  the  customer's  express  consent.  It  is  therefore 
necessary  for  every  active  brokerage  house  to 
get  the  customers'  consent  to  the  rehypothecation 
of  all  stocks,  regardless  of  the  amount  the  broker 
is  loaning  the  customer  on  them;  for  it  would 
be  a  very  difficult  and  laborious  task  for  the 
broker  to  continually  watch  all  his  loans  so  as 
to  avoid  borrowing  in  any  particular  case  more 
than  he  has  loaned  the  customer.  The  cus- 
tomer readily  gives  his  consent,  since  his  inter- 
ests are  not  affected. 

The  buyer  of  a  stock  is  entitled  to  a  certifi- 
cate or  certificates  for  the  number  of  shares 
bought,  but  not  to  any  particular  certificates  since 
all  the  certificates  are  alike,  each  representing 


OF  WALL  STREET  111 

merely  a  certain  share  of  the  whole  company. 
Hence  the  broker  is  not  obliged  to  get  back  from 
his  bank  the  exact  certificate  on  which  he  origi- 
nally borrowed  money  for  his  customer's  use. 
A  customer  will  sometimes  request  his  broker 
to  use  a  certain  amount  of  discretion  in  executing 
an  order — for  example,  to  buy  at  a  certain  price 
if  the  market  looks  right  to  the  broker  when 
that  price  is  reached.  The  broker  will  hardly 
ever  do  this  unless  as  personal  favor  to  a  friend, 
and  even  then  he  almost  always  has  occasion  to 
regret  having  been  too  accommodating,  for  the 
friend  is  pretty  sure  to  feel  some  dissatisfac- 
tion— uttered  or  unexpressed,  but  too  frequently 
uttered — with  the  broker's  judgment.  Most  ex- 
change members  have  an  absolute  rule  that  no 
discretionery  orders  will  be  accepted,  and  under 
any  ordinary  circumstances  the  house  that  ac- 
cepts them  will  be  regarded  with  suspicion. 

Interest 

The  broker  charges  his  customer  interest  for 
money  loaned  him  just  as  a  bank  would.  The 
rate  of  interest  is  usually  an  average  of  the 
rates  the  broker  is  paying  for  his  various  call 
and  time  loans,  with  a  trifle  added  for  the  cost 


112  THE  MACHINERY 

of  handling.  Many  brokers  always  charge  6 
per  cent. — or  more  if  the  current  market  rate 
is  higher — on  odd  lots  of  stocks,  because  the 
trouble  of  handing  a  10  share  lot  is  just  as  great 
as  that  of  handling  1,000  shares.  A  smaller  rate 
of  interest  is  credited  to  the  customer  on  money 
lying  idle  in  the  broker's  hands. 

Since  statements  of  accounts  are  usually  ren- 
dered to  the  customer  monthly,  the  interest 
charge,  whether  on  the  debit  or  the  credit  side, 
is  compounded  monthly.  Hence  when  the  cus- 
tomer borrows  heavily  from  his  broker  the  inter- 
est paid  becomes  a  somewhat  important  item — 
another  reason  in  favor  of  paying  for  stocks  in 
full  or  keeping  large  margins. 

The  present  scale  of  commissions  on  the  New 
York  Stock  Exchange  is  as  follows: 

Stocks  selling  under  $10 $7.50  per  100  shares 

Stocks  selling  at  $10  and  under  $125.15.00  per  100  shares 
Stocks  selling  at  $125  and  upward.  .20.00  per  100  shares 

Minimum    commission    $1.50 

Liberty  Bonds 25c  for  each  $100  or  fraction  thereof 

Other   listed   Bonds,   $1.25   per   $1,000,    with   minimum 
of  $1.25. 

On  the  selling  side  there  are  taxes  of  four 
cents  a  share.  Also,  the  execution  of  buying  and 
selling  orders  at  the  same  moment  is  usually 


OF  WALL  STREET  113 

%  or  X  apart — since  the  "market"  consists  of 
a  bid  price  and  asked  price.  The  buyer,  for 
example,  pays  81 1/4  while  the  seller  gets  only 
81^.  Hence  it  may  be  said  that  the  trader  who 
is  trying  to  make  a  profit  in  a  stock  selling  above 
$10  really  starts  with  a  loss  of  not  less  than 
$46.50  or  $56.50  per  hundred  shares,  to  which 
must  be  added  interest  when  he  is  operating  on 
the  long  side,  and  on  the  short  side  another  $2 
tax  if  the  broker  has  to  borrow  the  stock. 

The  short-seller  does  not  have  to  pay  inter- 
est, but  if  his  stock  sells  ex-dividend  while  he 
is  short  of  it  he  is  charged  with  the  amount  of 
the  dividend.  This  often  puzzles  the  novice,  but 
it  is  evident  that  the  buyer  of  the  stock  must  get 
his  dividend  from  some  source,  and  if  it  is  a 
short  sale  the  only  possible  source  of  the  dividend 
is  the  short-seller. 


CHAPTER  X 

Broker  and  Customer — The  Unlisted 
Market 

SINCE   the   broker   acts   as   the   customer's 
banker,  holding  for  him  securities  and  cash 
in  large  sums,  in  addition  to  being  his  agent 
in  the  execution  of  orders,  it  certainly  behooves 
the  customer  to  exercise  the  greatest  care  in  the 
selection  of  a  broker,  just  as  much  care  as  he 
would  show  in  picking  out  a  bank  in  which  to 
make  a  large  deposit. 

It  is  a  curious  fact,  however,  that  the  average 
customer  does  not  do  this.  The  great  numbers 
of  people  who  deposit  large  sums  and  valuable 
securities  with  brokers  in  regard  to  whom  they 
know  almost  nothing,  and  who  are  in  many  cases 
not  members  of  any  exchange,  is  a  standing  cause 
of  wonder  to  the  initiated.  It  seems  that  these 
people  are  doing  business  in  a  gambling  spirit 
and  look  upon  the  risk  of  placing  their  good 
money  in  the  hands  of  an  unknown  broker  as 
merely  a  part  of  the  gamble.  It  should  be  un- 
necessary to  say  that  the  person  who  approaches 
114 


THE  MACHNERY  OF  WALL  STREET    115 

Wall  Street  in  that  spirit  is  bound  to  lose.  He 
might  much  better  do  his  money  and  securities 
up  in  a  neat  bundle  and  present  them  to  a  Home 
for  the  Feeble  Minded,  where  he  stands  a  chance 
of  eventually  getting  some  indirect  benefit  out  of 
them. 

Brokers  and  Brokers 

There  are,  of  course,  plenty  of  perfectly  reli- 
able brokers  dealing  in  unlisted  securities  who 
are  not  members  of  any  exchange — also  plenty 
of  unreliable  ones.  The  novice,  unless  he  has 
the  means  of  informing  himself  fully  in  regard 
to  the  trustworthiness  of  brokers  not  members 
of  exchanges,  will  do  better  to  deal  with  such 
houses  on  a  cash  basis — that  is,  buying  his  securi- 
ties for  cash  and  taking  them  away  with  him,  or 
selling  for  cash  and  immediately  depositing  in 
his  bank  the  check  which  he  receives. 

Membership  in  a  leading  exchange  is  not  of 
course,  an  absolute  guarantee  of  the  trustworthi- 
ness of  a  broker,  but  it  is  very  strong  evidence, 
since  the  principal  exchanges  make  every  pos- 
sible effort  to  limit  their  membership  to  brokers 
of  high  standing.  Many  persons  are  ignorant  of 
the  fact  that  exchange  members  can  and  will 


116  THE  MACHINERY 

buy  or  sell  unlisted  securities  for  their  customers 
to  just  as  good  advantage  as  houses  which  make 
a  specialty  of  handling  only  unlisted  securities. 

When  it  comes  to  choosing  among  different 
exchange  members  the  personal  element  enters 
largely  into  the  situation.  The  majority  of  the 
customers  of  the  long-established  brokerage 
houses  are  acquainted  with  some  member  of  the 
firm  or  with  some  employee  holding  a  respon- 
sible position,  with  whom  they  consult  from  time 
to  time  personally  or  by  telephone.  Just  how 
much  good — or  harm — the  consultation  does 
them  depends  entirely  on  the  judgment  of  the 
person  consulted.  In  past  there  have  been  many 
"customers'  men"  who  were  not  above  giving 
whatever  advice  they  thought  the  customer  would 
be  most  likely  to  act  on,  and  unfortunately  there 
are  still  a  few  of  them  left  in  spite  of  the  fact 
that  such  a  short-sighted  policy  is  universally 
condemned  by  the  better  class  of  houses. 

A  broker  who  is  known  to  be  closely  identified 
with  "strong  interests"  or  who  has  himself  ac- 
cumulated a  fortune  through  operations  in  the 
market  generally  has  a  "following"  of  customers 
who  hope  to  profit  by  his  advice.  Such  advice  is 
often  valuable,  but  as  a  general  rule  not  nearly 


OF  WALL  STREET  117 

so  valuable  as  the  customer  expects  it  to  be,  since 
even  the  best  judges  often  go  wrong.  Moreover, 
the  customer  is  much  more  ready  to  follow 
advice  where  it  is  wrong  than  when  it  is  right. 
This  is  because,  in  order  to  make  profits  it  is 
usually  necessary  to  buy  when  the  market  looks 
weak  and  sell  when  it  looks  strong. 

Before  opening  an  account  with  any  broker  it 
is  well  to  visit  his  place  of  business  and  form 
your  own  opinion  as  to  his  character  and  methods 
and  to  get  a  report  on  him  from  an  unprejudiced 
source,  such  as  a  financial  publication  of  high 
standing,  or  a  New  York  bank  or  trust  company. 

Stock  exchange  methods  of  bookkeeping  are 
not  always  apparent  at  a  glance  to  a  new  cus- 
tomer who  receives  his  monthly  statement  of 
account.  Such  statements  differ  in  minor  details 
but  they  are  always  substantially  in  the  form  of 
the  example  given  herewith. 

A  Broker's  Statement 

The  folio  number  in  the  upper  right  hand 
corner  is  for  the  convenience  of  the  broker  in 
referring  to  his  own  books.  The  account  is 
debited  with  stocks  bought  and  credited  with 
stocks  sold,  credited  with  cash  deposits  and 


118  THE  MACHINERY 

debited  with  withdrawals,  and  the  statement  in- 
cludes a  memorandum  of  securities  on  hand, 
whether  long  or  short. 

In  the  example  shown,  we  have  first  a  state- 
ment of  the  condition  of  the  account  March  31. 
The  customer  was  long  60  shares  of  various 
stocks.  The  customer's  deposit  with  the  broker 
was  enough  to  pay  for  all  these  stocks,  with  the 
exception  of  $1,134.20,  which  was  loaned  him  by 
the  broker  and  therefore  debited  to  his  account. 
On  April  1  two  of  his  stocks  paid  dividends  and 
the  amount  of  the  dividends  was  duly  credited. 
(Note  that  this  amount  is  credited  when  the 
dividend  is  actually  received  by  the  broker,  not 
when  the  stocks  sell  ex-dividend  on  the  ex- 
change. ) 

April  17  the  customer  sold  10  A.  R. — Ameri- 
can Smelting — for  $973.75.  From  this  was  de- 
ducted $1.25*  commission  and  40  cents  taxes, 

*  It  would  now  be  $1.50. 


OF  WALL  STREET 


119 


§  ? 


as 


! 


•«•» 

If 


i 
i 

II 


3 l!     I 


120  THE  MACHINERY 

and  the  customer  was  credited  with  the  remain- 
der, $972.10.  He  did  not  happen  to  make  any 
purchases  during  the  month.  If  he  had  he  would 
have  been  debited  with  the  amount  paid  for  the 
stocks,  plus  commissions.  The  taxes  do  not  apply 
on  the  buying  side. 

Interest  is  figured  on  each  item  from  the  date 
of  entry  to  the  end  of  the  month.  The  interest 
is  always  first  computed  and  entered  in  the  in- 
terest columns  at  the  rate  of  6  per  cent. ;  then 
if  a  higher  or  lower  rate  is  charged  the  neces- 
sary change  is  made  in  the  final  interest  item  at 
the  end  of  the  month.  Hence  on  his  debit  bal- 
ance of  $1,134.20  March  31  the  customer  was 
charged  6  per  cent,  interest  for  30  days,  to  the 
end  of  April,  or  $5.67.  On  the  $30  received  as 
dividends  April  1  he  was  credited  interest  for 
29  days,  or  14  cents.  On  the  $972.10  received 
for  the  A.  R.  stock  April  17  he  was  credited 
interest  for  13  days,  $2.11.  The  interest  account 
was  balanced  by  the  entry  "Bal.  Int.  $3.42"  in 
the  right  hand  column.  This  balances  the  two 
interest  columns  and  the  $3.42  is  then  debited  to 
the  customer. 

The  final  result  is  a  debit  balance  of  $135.52 
on  April  30,  which  will  be  carried  forward  to 


OF  WALL  STREET  121 

the  next  monthly  statement,  and  he  also  has  on 
hand  "Collateral  as  above" — that  is,  50  shares 
on  various  stocks.  The  abbreviation  "E.  &  O.  E." 
at  the  lower  right  hand  corner  means  "Errors  and 
Omissions  Excepted." 

The  novice  often  expects  to  find  on  his  state- 
ment the  amount  of  his  deposit  with  the  broker 
plus  or  minus  his  profits  or  losses  for  the  month, 
but  the  broker's  books  are  not  kept  in  that  way 
and  the  customer  has  to  figure  out  these  items 
for  himself.  Most  active  operators  keep  a  memo- 
randum for  that  purpose. 

Unlisted  Securities 

Trading  was  formerly  permitted  on  the  floor 
of  the  Stock  Exchange  in  a  number  of  securities 
which  were  not  regularly  listed — that  is,  the  com- 
panies had  not  furnished  to  the  exchange  the 
information  in  regard  to  their  business  which 
would  warrant  the  governors  in  giving  the  securi- 
ties official  sanction  by  listing  them.  Some  of 
these  stocks  were  among  the  most  active,  such 
as  Amalgamated  Copper,  American  Smelting  & 
Refining,  etc. 

The  exchange  was,  however,  much  criticized 
for  permitting  the  trade  in  these  securities  to  go 


122  THE  MACHINERY 

on  and  the  "unlisted  department"  as  it  was  called, 
was  abolished  in  1910,  when  most  of  these  com- 
panies furnished  the  exchange  with  the  necessary 
information  and  were  duly  listed. 

The  term  unlisted  securities  is  now  used  to 
apply  to  those  which  are  not  listed  or  traded  on 
any  exchange  but  are  dealt  in  over  the  counters 
of  investment  houses.  The  Curb  still  has  both 
listed  and  unlisted  departments,  of  which  more 
later. 

The  market  for  unlisted  stocks  is  naturally 
not  so  "close"  as  that  for  listed  securities.  Vari- 
ous dealers  stand  ready  to  buy  such  stocks  at 
one  price  and  to  sell  at  a  somewhat  higher  price, 
but  the  difference  between  the  "bid"  price  and 
the  "asked"  price  is  generally  wider  than  in  the 
case  of  listed  stocks. 

The  broker  who  has  an  order  to  buy  or  sell 
a  stock  not  listed  on  any  exchange  has  to  tele- 
phone around  to  the  different  dealers  and  find 
the  best  price  at  which  his  order  can  be  executed. 
In  the  case  of  stocks  of  companies  located  in 
distant  cities  there  is  sometimes  a  better  market 
there  than  in  New  York  and  quotations  from  that 
point  are  obtained  over  the  broker's  private  wire 
or  over  the  public  wires,  as  may  be  necessary. 


OF  WALL  STREET  123 

In  some  unlisted  stocks  a  very  active  business 
is  at  times  transacted,  so  that  bid  and  asked 
quotations  may  be  obtainable  a  point  or  even  half 
a  point  apart,  but  on  other  securities  it  may  be 
impossible  to  sell  within  five  or  ten  points  of  the 
price  at  which  a  purchase  could  be  made.  Even 
if  there  is  a  close  market  at  the  moment,  there  is 
no  knowing  how  long  it  may  be  maintained,  since 
that  depends  very  largely  on  the  number  of 
people  who  may  happen  to  want  to  buy  or  sell 
at  any  time. 

For  this  reason  unlisted  stocks  do  not,  as  a 
rule,  afford  a  desirable  medium  for  speculation. 
On  the  other  hand,  it  is  evident  that 
the  investor  may  sometimes  get  a  better  bar- 
gain in  such  stocks  relatively  to  the  normal 
market  price,  than  he  could  get  in  most  listed 
stocks.  For  example,  the  owner  of  an  un- 
listed stock  may  be  willing  to  sell  at  110  or 
to  buy  more  at  100.  If  he  places  an  "open" 
or  "G.  T.  C." — good  till  countermanded  or 
executed — order  with  his  broker  to  buy  at  100 
or  sell  at  110,  he  might  eventually  see  both 
orders  executed,  in  which  case  he  would  have 
a  profit  of  ten  points  and  would  still  be  just 
where  he  started  as  regards  the  amount  of  the 
stock  owned. 


124  THE  MACHINERY 

Trading  in  the  unlisted  stocks  is,  therefore, 
a  very  different  proposition  from  doing  busi- 
ness in  the  active  listed  stocks.  An  expert  in 
a  certain  class  of  securities  can  often  make 
large  yearly  profits  by  buying  below  the  cur- 
rent market  and  selling  above  it.  Many  un- 
listed securities  of  a  high  investment  grade  do 
not  fluctuate  widely,  except  as  the  price  swings 
back  and  forth  between  the  bid  and  asked 
limits,  so  that  trading  of  this  kind  may  some- 
times be  carried  on  with  only  a  very  moderate 
risk. 

Such  trading  is  naturally  pretty  much  con- 
fined to  experts  who  have  had  long  experience 
with  some  particular  line  of  securities.  The 
average  investor  is  merely  interested  in  getting 
a  fair  price  when  he  wishes  to  buy  or  sell, 
since  he  depends  mainly  on  the  income  yield 
from  such  stocks  as  a  warrant  for  owning 
them.  His  broker  can  be  depended  on  to  exe- 
cute orders  at  a  fair  price  if  he  is  not  hurried 
too  much.  Some  sacrifice  usually  has  to  be 
made  to  sell  such  stocks  "at  the  market." 
Orders  to  buy  or  sell  them  are  generally 
limited  to  a  fixed  price,  which  has  to  be  low- 
ered or  raised  in  case  it  proves  impossible  to 
execute  at  that  price. 


OF  WALL  STREET  125 

In  recent  years  there  has  been  a  great  in- 
crease in  the  number  of  stocks  which  are  dealt 
in  over  the  counter.  The  public  seems  to  im- 
agine that  these  stocks  are  safer  to  own  than 
the  stocks  on  the  exchange  in  which  there  is 
usually  a  big  speculation.  That  is  a  false  idea. 
The  stock  in  which  there  is  a  big  speculation 
may  have  more  minor  fluctuations,  but  as  re- 
gards the  wide  movements  it  adjusts  itself  to 
the  conditions  more  accurately  than  it  would 
if  it  were  unlisted. 


CHAPTER  XI 

The  Curb  Market— Private  Bankers 

THE  Curb  Market  consists  of  a  rather 
loose  organization  of  brokers  who  trans- 
act business  in  stocks  in  a  roped-off 
section  of  Broad  Street  just  below  Exchange 
Place,  a  block  from  the  New  York  Stock  Ex- 
change and  about  the  same  distance  from  the 
Consolidated  Exchange.  The  Curb  in  its  pres- 
ent form  is  over  35  years  old;  but  there  has 
always  been  trading  on  the  curb  ever  since 
stocks  began  to  be  actively  bought  and  sold. 
In  fact,  the  New  York  Stock  Exchange  itself 
was  originally  a  curb  market,  around  the  but- 
tonwood  tree  at  68  Wall  Street. 

The  necessity  for  a  Curb  Market  in  addition 
to  the  various  stock  exchanges  is  not  always 
understood  at  a  glance  by  the  investor.  It 
would  seem  as  though  the  exchanges,  in  con- 
nection with  the  trading  in  unlisted  stocks 
"over  the  counter,"  would  afford  ample  oppor- 
tunity for  handling  all  kinds  of  business  in 
stocks. 

126 


THE  MACHINERY  OF  WALL  STREET    127 

Nevertheless  the  Curb  Market  has  its  legiti- 
mate place  in  the  machinery  of  Wall  Street, 
as  well  as  in  other  great  financial  centers. 

Why  the  Curb  Is  Needed 

Suppose,  for  example,  that  the  investor  has 
subscribed  for  ten  of  a  new  issue  of  bonds  just 
being  brought  out  by  the  underwriters,  but 
owing  to  the  fact  that  the  issue  was  over- 
subscribed— which  is  nearly  always  the  case — 
he  obtained  only  two  of  the  bonds.  He  wishes 
to  buy  more  of  the  bonds  at  once,  believing 
that  the  price  will  be  higher  after  the  bonds 
have  been  distributed  to  buyers,  but  since  the 
bonds  cannot  yet  be  delivered  he  cannot  make 
the  purchase  on  any  exchange  or  over  the 
counter. 

This  is  where  the  Curb  Market  steps  in. 
The  investor  directs  his  broker  to  offer  a  cer- 
tain price  on  the  Curb  for  the  bonds  "when, 
as  and  if  issued."  Many  other  investors  offer 
to  buy  or  sell  in  the  same  way,  so  that  a  mar- 
ket price  is  established  for  the  bonds  some 
time  before  they  are  actually  in  existence.  It 
occasionally  happens  that  the  bonds  are  not 
issued  after  all  and  in  that  event  all  the  trans- 


128  THE  MACHINERY 

actions  that  have  been  made  in  them  have  to 
be  cancelled. 

Trading  "when,  as  and  if"  is  often  carried 
to  absurd  extremes.  A  big  automobile  com- 
bination was  recently  proposed  and  trading  in 
its  stocks  began  on  the  Curb  almost  as  soon 
as  the  idea  had  germinated  in  the  minds  of  its 
sponsors  and  even  before  any  name  had  been 
suggested  for  the  corporation.  In  that  in- 
stance the  combination  did  not  go  through — 
owing,  it  was  said,  to  the  opposition  of  leading 
bankers— and  all  the  trading  in  the  stocks  it 
might  have  issued  had  to  be  undone. 

Even  after  the  stock  certificates  of  a  new  cor- 
poration have  been  issued  they  are  not  usually 
listed  at  once  on  the  stock  exchanges,  because 
the  new  company,  if  an  untried  venture,  cannot 
present  to  the  exchanges  an  official  statement 
definite  enough  to  warrant  listing.  In  the 
meantime  there  may  be  a  great  deal  of  buying 
and  selling  of  the  stocks,  so  much  that  it  would 
be  inconvenient  and  burdensome  to  handle  it 
all  over  the  counter.  The  situation  is  much 
simplified  when  all  brokers  having  orders  in 
such  a  stock  gather  in  the  Curb  Market  to 
execute  them. 


OF  WALL  STREET  129 

Even  though  a  company  may  have  been  in 
existence  a  long  time,  its  standing  may  not 
for  one  reason  or  another  be  satisfactory  to 
the  listing  committee  of  the  exchange,  so  that 
its  stocks  continue  to  be  traded  in  on  the  Curb. 
There  is  no  doubt  about  the  usefulness  of  the 
Curb  Market  in  such  cases.  People  must  have 
an  opportunity  to  buy  and  sell  all  kinds  of 
stocks. 

The  reason  why  the  Curb  Market  stays  on 
the  street  instead  of  housing  itself  more  com- 
fortably is  that  the  constitution  of  the  New 
York  Stock  Exchange  prohibits  its  members 
from  being  represented  on  any  other  exchange, 
and  at  least  75  per  cent,  of  the  business  on 
the  Curb  now  originates  with  Stock  Exchange 
houses.  So  the  Curb  stays  outdoors  and  in 
only  a  partially  organized  condition. 

The  Curb  Organization. 

Previous  to  1910  the  Curb  had  no  organiza- 
tion, except  such  as  naturally  resulted  from 
necessity.  Brokers  on  the  Curb  could  not 
safely  do  business  with  persons  whose  re- 
sponsibility was  unknown  to  them,  hence  the 
trade  was  practically  all  handled  by  the  same 


130  THE  MACHINERY 

group  of  brokers  from  day  to  day  and  their 
methods  naturally  fell  into  a  sort  of  system. 

In  1909  the  Hughes  Commission  report  criti- 
cized the  Curb  for  obstructing  the  street,  for 
being  unorganized,  for  the  frequency  of 
manipulation  there,  and  for  sometimes  dealing 
in  securities  nearly  if  not  quite  fraudulent. 
Partly  as  a  result  of  this  criticism  the  New 
York  Curb  Association  was  formed,  with  about 
250  members  paying  annual  dues  of  $100  each 
and  with  rules  and  regulations  similar  to  those 
of  the  New  York  Stock  Exchange.  Listing 
requirements,  however,  were  far  from  strin- 
gent, and  it  was  soon  found  impossible  to  con- 
fine the  trading  to  listed  stocks,  so  that  the 
Curb  now  has  listed  and  unlisted  departments 
as  the  Stock  Exchange  did  formerly. 

There  is  this  difference,  however,  that  the 
Curb  Market  is  theoretically  open  to  all  who 
choose  to  trade  there.  But  since  strangers 
must  be  properly  identified  in  order  to  guar- 
antee the  safety  of  dealing  with  them,  the 
result  is  that  the  business  is  practically  all 
done  through  the  regular  Curb  brokers. 

The  Curb  is  one  of  the  show  places  of  New 
York  and  on  an  active  day  the  crowd  of  howl- 


OF  WALL  STREET  131 

ing,  gesticulating  brokers  in  the  middle  of  the 
street  is  a  novel  and  interesting  sight.  Curb 
brokerage  houses  rent  offices  overlooking  the 
street,  it  possible,  and  orders  are  transmitted 
from  the  windows  to  the  Curb  by  systems  of 
signs,  or  sometimes  by  a  bit  of  paper  lowered 
by  a  string  from  a  high  window.  Window 
space  is  naturally  at  a  premium. 

Issues  Traded  In 

The  issues  traded  in  on  the  Curb  ere  con- 
stantly changing.  The  best  of  them  are  usually 
listed  on  the  Stock  Exchange  after  their  re- 
liability has  been  reasonably  demonstrated. 
Some  are  finally  lodged  in  the  hands  of  inves- 
tors who  hold  them  permanently,  so  that  active 
trading  in  them  dries  up.  Many  of  the  com- 
panies represented  are  wafted  away  untimely 
to  that  bourne  from  which  no  traveller  re- 
turns, for  the  prosaic  reason  that  the  enter- 
prise has  failed  to  pay.  These  are  the  issues 
found  in  nearly  every  investor's  strong  box 
which  are  preserved  only  for  sentimental  rea- 
sons, to  be  taken  out  and  regarded  mourn- 
fully from  time  to  time  and  then  laid  tenderly 
back  again.  For  some  reason  nobody  ever 


132  THE  MACHINERY 

throws  them  away,  even  though  the  hole  in  the 
ground  they  represent  may  be  flooded  and 
moss-giown. 

On  the  other  hand,  there  are  many  sound  in- 
vestment securities  traded  in  on  the  Curb,  such 
as  the  Standard  Oil  stocks  and  numerous  good 
mining  and  industrial  securities. 

The  activity  of  the  Curb  Market  fluctuates 
widely  in  different  years.  In  1899  Curb  busi^ 
ness  became  very  large,  but  it  fell  off  in  later 
years  until  another  Curb  boom  appeared  in 
1906.  After  that  there  was  a  long  period  of 
comparative  dullness,  but  in  1915  and  subse- 
quent years  business  again  rose  to  record- 
breaking  proportions.  On  some  days  the  num- 
ber of  shares  changing  hands  was  nearly  equal 
to  the  transactions  on  the  New  York  Stock 
Exchange — but,  of  course,  their  value  was 
much  less,  since  many  of  them  have  a  low  par 
value  and  an  even  lower  market  value. 

Manipulation  is  much  easier  on  the  Curb 
than  on  the  Exchange.  It  is  not  very  diffi- 
cult for  the  interests  behind  a  Curb  stock  to 
mark  it  up  or  down,  within  reasonable  limits, 
because  the  number  of  resting  or  "good-till- 
cancelled"  orders  may  be  very  small.  How- 


OF  WALL  STREET  133 

ever,  this  very  fact  may  give  the  genuine  in- 
vestor, who  has  a  standing  order  in  the  market, 
an  opportunity  to  buy  at  a  low  figure  or  sell 
at  a  high  one,  so  that  even  this  evil  is  not  with- 
out some  small  compensations. 

Wall  Street  has  done  much  less  toward  com- 
plying with  the  recommendations  of  the 
Hughes  Commission  on  the  Curb  than  on  the 
New  York  Stock  Exchange.  The  cynics  say 
that  this  is  because  the  big  Stock  Exchange 
houses  want  to  keep  one  place  where  they  can 
carry  on  their  manipulations  substantially  un- 
hindered. But  this  is  not  a  fair  statement  of 
the  case.  If  people  want  to  buy  and  sell  stocks' 
of  uncertain  value  they  are  going  to  do  it  in 
some  way,  and  indeed  they  have  the  right  to  do 
it,  and  it  is  the  character  of  some  of  the  stocks- 
traded  in  on  the  Curb  that  makes  manipula- 
tion possible  rather  than  the  methods  by  which 
the  business  is  handled.  If  the  Curb  were  to 
be  turned  into  another  exchange,  with  rigid 
listing-  requirements,  the  immediate  result 
would  be  the  formation  of  a  new  curb  market 
to  accommodate  the  business  thus  crowded 
out. 


134  THE  MACHINERY 

Private  Bankers 

On  most  of  the  Curb  stocks  the  banks  and 
trust  companies  do  not  care  to  lend  money. 
Hence  the  New  York  Stock  Exchange  houses 
and  the  more  conservative  Curb  brokers  will 
not  buy  such  stocks  for  their  customers  on 
margin.  It  is  to  be  regretted  that  the  Curb 
organization  is  unable  to  enforce  this  rule  on 
all  its  members,  since  most  of  the  stocks 
traded  in  are  unsuited  to  margin  operations. 
There  are,  however,  a  large  number  of  private 
banking  houses  which  undertake  to  buy  Curb) 
stocks  for  their  customers  on  margins.  These 
houses  may  call  themselves  "investment  bank- 
ers," or  "bankers  and  brokers,"  or  "stock  brok- 
ers," or  by  any  other  name;  but  since  they 
make  a  business  of  lending  money  on  stocks 
which  will  not  be  accepted  as  collateral  by  the 
banks  they  are  in  reality  private  bankers. 

While  it  would  be  difficult  to  prove  it,  there 
can  be  little  doubt  that  some  of  these  houses 
do  not  actually  carry  all  the  stocks  their  cus- 
tomers are  supposed  to  own.  In  other  words, 
after  buying  stocks  for  a  margin  customer,  the 
house  soon  takes  a  favorable  opportunity  of 
selling  the  same  stocks  for  its  own  account. 


OF  WALL  STREET  135 

This  leaves  the  customer  long  and  the  house 
short  of  the  same  stocks,  and  it  entirely  ob- 
viates the  difficulty  which  the  house  might 
have  in  getting  the  money  to  finance  large  pur- 
chases of  stocks  by  its  customers.  In  the 
meantime  the  customer  is,  of  course,  paying1 
interest  on  the  money  he  is  supposed  to  be 
borrowing,  which  means  profits  to  the  house. 
When  the  customer  sells  his  stocks  the  house 
at  the  same  time  or  soon  after  covers  its  short 
sale  of  those  stocks. 

This  operation  is  so  near  "bucketshopping" 
that  it  would  be  hairsplitting  to  attempt  to 
discriminate,  yet  it  is  very  difficult  to  detect 
and  it  would  be  still  more  difficult  to  stop  it 
by  legislation.  The  broker  has  executed  his 
customer's  orders  correctly.  The  customer 
has  received  his  due  profits  or  suffered  his 
loss  as  the  case  may  be.  What  cause  of  com- 
plaint has  he?  If  the  broker  saw  fit  to  enter 
upon  certain  short  contracts  similar  to  his 
customer's  purchase,  that  was  the  broker's 
affair.  He  might  make  or  lose  by  those  short 
sales,  but  in  either  case  the  customer  is  not 
affected — provided  the  broker  remains  solvent. 

This  provision  is  an  important  one,  how- 


136  THE  MACHINERY 

ever,  for  the  mortality  among  houses  of  this 
class  is  very  high.  They  are  the  prostitutes 
of  the  Street,  selling  their  honor  for  commis- 
sions and  interest,  and  they  are  apt  to  live  the 
short  and  hectic  life  of  the  prostitute.  The  in- 
telligent part  of  the  public  avoids  them  as 
a  pestilence,  but  there  is  always  a  careless  and 
unintelligent  public  which  wants  to  deal  in 
Curb  stocks  on  margain  and  is  not  discrimin- 
ating in  choosing  its  brokers. 

The  term  "private  banker"  is  about  the  most 
elastic  in  the  realm  of  finance.  Some  private 
banking  houses  are  nearly  as  strong  as  the 
Bank  of  England ;  others  are  capitalized  solely 
upon  the  nerve  of  some  ex-convict  or  graduate 
bucketshop  man. 

The  great  international  banking  houses  are 
all  private  bankers — such  as  J.  P.  Morgan  & 
Co.,  Kuhn,  Loeb  &  Co.,  J.  &  W.  Seligman  & 
Co.,  Speyer  &  Co.,  etc.  These  houses  are 
closely  connected  with  the  best  investment 
bankers  of  other  cities  and  they  are  frequently 
the  representatives  here  of  the  leading  firms 
or  even  the  governments  of  Europe  and  other 
continents. 


CHAPTER  XII 

The  Promoter — Underwriting 
Syndicate 

WITHOUT  doubt  the  majority  of  the 
people  of  the  United  States  regard  the 
promoter  as  a  "shark."  That  opinion 
is  not  wholly  unreasonable,  for  a  great  many 
"sharks'*5  have  posed  as  promoters,  but  the 
business  of  the  honest  and  legitimate  promoter 
is  one  of  the  most  useful  of  all  occupations  and 
is  of  very  high  value  to  the  community.  For 
that  reason  it  is  a  rule  highly  paid. 

The  greatest  advances  in  civilization  are  al- 
wavs  made  by  some  new  combination  of  ma- 
terials or  resources  or  both.  A  new  combina- 
tion of  this  sort  that  will  really  work  and  pro- 
duce the  desired  result  is  very  hard  to  think 
up  and  still  harder  to  put  into  practical  oper- 
ation. 

When  a  new  combination  of  materials  re- 
sults in  some  great  improvement  its  effects  are 
generally  appreciated  by  the  people  and  what- 
ever profits  the  investor  may  realize  are  never 
begrudged  him.  Every  one  sees  the  advantage 
137 


138  THE  MACHINERY 

of  the  electric  light,  for  example,  and  is  glad  to 
see  Mr.  Edison  make  money  out  of  it.  But 
the  immense  value  to  the  public  of  the  ability 
to  combine  resources,  to  put  capital,  labor  and 
materials  together  in  such  a  way  as  to  do 
necessary  work  more  economically  or  to 
achieve  some  result  previously  impossible,  is 
understood  by  only  a  few  persons  out  of  the 
multitude. 
Why  the  Promoter  Is  Entitled  to  Big  Profits 

Suppose,  for  example,  an  inventor  claims 
that  he  has  discovered  a  method  of  making 
steel  rails  that  will  not  break  in  any  weather 
or  under  the  heaviest  loads.  Others  have 
money  that  they  would  gladly  invest  in 
the  enterprise  of  making  unbreakable  rails. 
Skilled  engineers  know  how  to  test  the  rails 
and  investigate  the  process.  Others  own  the 
coal  and  iron  and  other  materials  needed. 
There  are  railroads  which  would  gladly  buy 
the  rails  if  satisfied  that  results  were  assured, 
but  none,  of  these  people  know  the  others  and 
none  of  them  would  believe  what  any  one  of 
the  others  might  claim  in  regard  to  the  enter- 
prise. 

Under  such  conditions  the  public  is  a  long 


OF  WALL  STREET  139 

way  from  getting  the  benefit  of  the  unbreak- 
able rails.  The  inventor  might  die  a  poor  and 
saddened  man,  the  investors  might  never  get 
more  than  savings  bank  interest  on  their 
money,  the  engineer  might  be  out  of  a  job,  the 
coal  and  iron  might  continue  to  lie  worthless 
in  the  ground,  the  railroads  might  continue  to 
suffer  from  accidents,  many  passengers  might 
be  killed  and  much  property  destroyed — unless 
somebody  appeared  who  could  combine  all  the 
separate  elements  and  make  the  rails. 

But  suppose  a  well-known  banking  house, 
which  by  a  half  century  of  honest  and  intelli- 
gent dealing  has  gained  the  confidence  of  all 
parties,  takes  the  matter  up,  brings  all  the 
necessary  experts  together,  plans  a  location 
where  the  materials  are  easy  of  access,  forms 
the  corporation  and  sells  the  securities  to  its 
clients  and  to  the  public,  turns  out  the  rails 
and  supplies  them  to  the  roads.  All  parties 
believe  what  the  bankers  say  because  they 
know  that  the  bankers'  most  valuable  asset  is 
reliability. 

It  is  evident  that  this  banking  house  has 
rendered  an  exceedingly  valuable  service  to  the 
public  and  a  service  which  very  few  are  in  a 


140  THE  MACHINERY 

position  to  perform  successfully.  It  is  entitled 
to  a  correspondingly  liberal  remuneration  for 
its  services  in  the  promotion.  And  the  same 
would  of  course  apply  to  the  individual  pro- 
moter. 

Perhaps  mankind  may  some  day  evolve  a 
better  and  more  economical  way  of  making 
these  necessary  combinations  of  men,  money 
and  materials,  which  will  eliminate  the  very 
large  profits  often  gained  by  those  individuals 
who  are  in  a  position  to  handle  such  promo- 
tions ;  but  until  that  time  comes  we  shall  have 
to  admit  that  the  promoter  earns  his  pay,  large 
though  it  may  sometimes  be.  And  promotion 
will  continue  to  be  the  principal  function  of 
our  greatest  private  banking  houses. 

This  class  of  bankers  also  do  a  genuine  bank- 
ing business.  They  make  all  sorts  of  loans, 
buy  and  sell  commercial  paper  and  many  of 
them  deal  in  foreign  exchange.  They  often 
carry  the  accounts  of  our  greatest  corporations, 
which  in  many  cases  they  have  been  influential 
in  establishing.  They  buy  and  sell  investment 
securities  and  underwrite  new  issues  of  stocks 
and  bonds,  promote  industrial  companies, 
handle  the  reorganization  of  insolvent  rail- 
roads. 


OF  WALL  STREET  141 

A  fe\\  of  the  biggest  of  these  private  banking 
houses  have  enormous  financial  power  and  in- 
fluence. They  use  it  chiefly  for  the  financial 
benefit  of  themselves  and  their  associates  and 
clients.  Yet  since  the  whole  country  must 
stand  or  fall  together,  their  general  attitude 
toward  business  must  necessarily  be  construc- 
tive. In  a  broad  way,  they  cannot  harm  the 
rest  of  the  country  without  harming  them- 
selves, because  their  interests  are  so  widely  dis- 
tributed. In  times  of  panic  the  country  has 
again  and  again  turned  to  these  houses  to  save 
the  day.  They  have  been  sometimes  charged 
with  producing  panics  for  their  own  benefit  but 
the  accusation  is  absurd.  They  would  always 
profit  far  more  from  prosperity  than  from  panic 
and  depression. 

But  there  is  no  magic  about  the  term  "pri- 
vate bankers."  It  may  have  everything  be- 
hind it — or  nothing. 

Underwriting. 

The  successful  distribution  of  new  securities 
among  investors  is  not  an  easy  matter.  Under 
ordinary  conditions  it  is  not  easy  to  sell  a  man 
anything.  He  is  cautious  and  fearful  about 


142  THE  MACHINERY 

letting  go  of  his  money.  And  when  all  he  TS 
getting  in  return  for  it  is  a  piece  of  paper  carry- 
ing certain  engraved  promises  of  greater  or 
less  significance,  he  becomes  still  more  cau- 
tious. 

For  this  reason  the  prime  necessity  in  sell- 
ing securities  is  the  confidence  of  the  public, 
and  in  order  to  sell  a  large  issue  of  stocks  or 
bonds  it  is  necessary  to  get  in  touch  with  nu- 
merous banking  houses  which  have  the  con- 
fidence of  their  clients.  Each  of  these  houses 
must  of  course  be  paid  for  its  services  in  some 
way,  and  this  is  usually  accomplished  through 
the  process  of  underwriting. 

For  example,  a  big  railroad  wishes  to  sell 
$100,000,000  bonds  to  get  the  money  for  needed 
extensions  and  improvements.  One  of  the 
leading  firms  of  private  bankers  which  is  ac- 
customed to  handle  such  business  for  the  road 
takes  charge  of  the  financing,  charging  a  com- 
mission for  its  services.  This  firm  then  forms 
a  syndicate  of  other  bankers,  dealers  in  invest- 
ments, and  brokerage  houses.  Each  member 
of  the  syndicate  agrees  to  take  a  certain  num- 
ber of  the  bonds  and  pay  for  them  at,  let  us 
say,  97,  if  necessary — that  is,  if  they  are  not 


OF  WALL  STREET  143 

sold  to  investors  direct. 

The  bonds  are  then  issued  and  offered  to  the 
public  at,  perhaps,  99.  The  bonds  are  adver- 
tised in  the  newspapers  and  financial  publica- 
tions and  the  various  members  of  the  syndicate 
send  out  circulars  to  their  clients  describing 
and  recommending  the  bonds.  If  conditions 
are  favorable  the  bonds  may  all  be  sold  to  in- 
vestors and  the  syndicate  receives  its  profit  of 
$20  on  each  $1,000  bond  (less  expenses)  for  its 
services  in  selling  the  bonds  and  also  for  in- 
suring the  sale  of  them  in  advance. 

If  only  half  the  bonds  are  sold  to  investors, 
then  the  members  of  the  syndicate  are  called 
upon  to  take  the  rest  at  the  agreed  price  of 
97.  They  may  later  be  able  to  sell  them  at  99 
or  even  higher,  but  under  some  conditions  they 
might  have  to  carry  the  bonds  for  a  consider- 
able time  or  even  to  sell  them  at  less  than 
the  syndicate. 

A  number  of  the  leading  private  banking 
houses  are  so  strongly  intrenched  in  the  con- 
fidence of  the  public  and  of  other  investment 
dealers  that  the  success  of  any  offering  they 
consent  to  undertake  is  assured  from  the  start. 
In  fact,  the  smaller  investment  houses  which 


144  THE  MACHINERY 

are  usually  invited  to  join  syndicates  being 
formed  by  these  leaders  hardly  feel  at  liberty 
to  decline,  even  though  in  some  special  in- 
stance they  might  prefer  to  stay  out ;  for  if  they 
refuse  to  join  in  one  syndicate  they  are  very 
likely  to  be  left  out  of  the  others  which  will 
certainly  follow,  and  this  they  cannot  afford. 

There  are  many  issues  of  securities  which 
leading  private  bankers  do  not  care  to  handle, 
either  because  the  issue  is  too  small  to  yield 
•enough  profit  or  because  its  safety  does  not 
conform  to  their  high  standards.  Small  is- 
sues are  handled  by  smaller  houses,  which  may 
be  of  equal  standing  with  the  great  leaders  of 
the  Street,  only  not  so  widely  known. 

Speculative  issues  are  handled  by  other 
houses,  each  house  taking  its  character  and 
standing  from  the  securities  which  it  sponsdrs. 
The  more  doubtful  the  enterprise  the  larger 
the  profits  it  has  to  promise  in  order  to  attract 
buyers,  and  as  a  general  rule  the  greater  the 
promises  the  greater  the  risks. 

Individual  Promoters 

Often  these  speculative  issues  are  handled 
by  individual  promoters,  whc  may  own  the  en- 


OF  WALL  STREET  145 

terprisc  themselves  or  may  receive  a  com- 
mission of  10  or  15  per  cent,  for  selling  the 
securities.  The  ordinary  method  is  to  obtain 
a  list  of  possible  investors  and  mail  out  large 
numbeis  of  prospectuses  describing  the  future 
of  the  enterprise  in  glowing  terms.  This  is 
an  expensive  method  of  promotion,  since  most 
of  the  circulars  go  into  the  waste-baskets  of 
the  recipients.  Even  under  favorable  condi- 
tions securities  can  hardly  e\  er  be  sold  in  this 
way  at  a  cost  of  less  than  one-fourth  of  the 
cash  received,  and  sometimes  practically  all 
the  receipts  are  absorbed  in  expenses  and  com- 
missions, resulting  in  the  early  death  of  the 
company,  even  though  the  scheme  might  have 
been  meritorious  enough  to  succeed  if  enough 
money  could  have  been  cheaply  obtained  from 
the  puolic. 

Very  few  of  these  individual  promoters  start 
out  with  the  deliberate  intention  of  being 
swindlers,  although  they  are  pretty  sure  to  be 
called  that  if  for  any  reason  whatever  the  en- 
terprise does  not  succeed.  Most  of  them  are 
the  victims  of  a  mistaken  enthusiasm — but  of 
course  that  fact  does  not  help  the  investor  who 
has  lost  his  money  through  them. 


146  THE  MACHINERY 

Some,  however,  are  merly  "fakes."  They 
issue  attractive  prospectuses  regardless  of  the 
actual  prospects  of  the  company — in  fact  the 
company  is  nothing  but  a  legal  peg  on  which 
to  hang  their  glittering  rhetoric.  Their  only 
anxiety  is  to  get  the  money  of  "suckers"  by 
outwitting  the  law.  The  difficulties  in  the 
way  of  doing  this  increase  year  by  year. 
More  and  more  stringent  laws  have  been 
passed  and  they  are  better  enforced  than  for- 
merly. But  the  evil  is  not  entirely  extin- 
guished and  perhaps  never  will  be. 

The  Post  Office  Department  of  the  Federal 
Government  has  been  active  in  recent  years  in 
checking  the  operations  of  fake  promoters, 
since  it  is  almost  necessary  for  them  to  oper- 
ate by  mail.  The  Post  Office  has  an  almost 
autocratic  power  in  dealing  with  suspects  of 
this  class,  and  it  has  probably  made  some  mis- 
takes; yet  on  the  whole  it  has  been  of  very 
great  service  in  terminating  the  careers  of 
swindlers. 

The  newspapers  have  also  become  much 
more  careful  in  accepting  the  advertising  of 
promoters.  Some  years  ago  it  was  purely  a 
case  of  caveat  emptor  for  the  reader  of  finan- 


OF  WALL  STREET  147 

cial  advertising — or  perhaps  sauve  qui  peut 
would  be  an  even  more  apt  expression;  but 
most  of  the  papers  now  make  a  sincere  effort 
to  shut  out  financial  swindlers  from  their  col- 
umns, and  many  of  them  even  exclude  all  se- 
curity issues  of  a  highly  speculative  character. 

A  sort  of  detective  agency  is  maintained  in 
Wall  Street  for  the  benefit  of  newspapers, 
financial  publications  and  others  who  may  need 
"inside  information"  in  regard  to  the  charac- 
ter of  the  thousands  of  people  who  are  doing 
business  in  the  financial  district.  Furnishing 
accurate  information  of  this  kind  is  a  very 
large  contract  and  in  the  nature  of  the  case  it 
cannot  a  ways  be  thorough-going.  Mistakes 
are  sometimes  made  and  some  injustice  doubt- 
less results — lor  when  once  the  man  who  is  try- 
ing to  do  business  in  Wall  Street  gets  "a  can 
tied  to  his  tail"  he  might  as  well  shut  up  shop 
or  change  his  name — but  on  the  whole  the 
effect  has  been  good. 

The  sale  of  doubtful  securities  by  promoters 
depends  upon  the  gambling  spirit  among  their 
patrons  and  therefore  it  is  not  likely  that  it  can 
ever  be  entirely  stopped.  Perhaps  there  was  a 
lime  when  the  buyer  of  such  stocks  was  really 


148  THE  MACHINERY 

carried  away  by  the  promises  of  the  prospec- 
tus, but  there  are  few  such  instances  now. 
The  buyer  fully  realizes  that  he  is  taking  a 
"long  shot,"  but  he  figures  that  if  one  out  of 
ten  of  these  enterprises  succeeds  the  profits 
may  be  Jarge  enough  to  cover  the  nine  losses* 
It  is  doubtless  unnecessary  to  add  that  this 
is  not  so.  Not  one  out  of  a  hundred  of  these 
highly  "promising"  promotions  ever  "makes 
good."  More  than  that  have  merit — perhaps 
half  of  them  have  merit,  to  a  greater  or  less 
degree — but  it  takes  something  besides  a  good 
idea  to  make  a  business  success.  Insufficient 
capital  and  poor  management  are  usually  the 
rocks  on  which  these  enterprises  founder. 


CHAPTER  XIII 

Distribution  of  News  and  Quotations 

A  MOST  important  and  interesting  part  of 
the  machinery  of  Wall  Street  is  that 
which  collects  from  all  over  the  world 
the  items  of  news  which  may  affect  the  mar- 
kets and  distributes  them  to  brokers  and  in- 
vestors, and  then  collects  on  the  floors  of  the 
several  exchanges  the  quotations  resulting 
from  the  orders  constantly  flowing  in  and  dis- 
tributes these  quotations  to  the  public. 

The  men  who  have  large  interests  at  stake 
in  the  markets  cannot,  of  course,  wait  for  the 
newspapers.  They  and  the  'brokers  who  serve 
them  make  every  effort  to  get  each  item  of 
news  by  telephone  or  telegraph  at  the  earliest 
possible  moment. 

Happenings  on  the  floors  of  the  exchanges 
are  reported  by  telephone  or  sometimes  by 
written  memoranda  dispatched  by  messengers. 
These  messages  are  quickly  typed  and  filed  In 
customers'  rooms.  When  the  news  is  very  im- 
portant it  is  transmitted  by  telephone  or  tele- 
149 


150  THE  MACHINERY 

graph  to  the  broker's  clients  who  are  not  at  the 
broker's  office. 

Important  news  from  all  over  the  world  is 
also  frequently  forwarded  by  wire  or  cable,  in 
order  to  get  it  to  its  destination  ahead  of  the 
regular  news  channels.  Such  an  event  as  a 
decision  of  the  Supreme  Court,  for  example,  is 
likely  to  be  felt  on  the  floor  of  the  Stock  Ex- 
change in  five  minutes  after  its  purport  can  be 
gathered  by  representatives  on  the  spot.  In 
at  least  one  instance  a  nervous  and  over- 
wrought watcher  did  not  wait  long  enough  to 
get  an  understanding  of  a  court  decision  and 
forwarded  an  incorrect  message  which  caused 
a  considerable  slump  on  the  Exchange  before 
it  could  be  corrected. 

The  News  Agencies 

It  is  only  in  regard  to  news  of  special  im- 
portance that  private  messages  are  employed. 
The  great  bulk  of  the  news  which  may  affect 
the  markets  is  gathered  by  the  two  Wall  Street 
news  agencies — Dow,  Jones  &  Co.  and  the  New 
York  News  Bureau — with  the  aid  of  the  Asso- 
ciated Press,  foreign  news  agencies,  local  news 
organizations  in  various  American  cities,  and 


OF  WALL  STREET  151 

special  representatives.  Very  little  worthy  of 
note  escapes  these  Argus-eyed  organizations. 

To  save  the  time  required  to  duplicate  or 
print  and  distribute  these  items,  they  are  first 
sent  out  in  condensed  form  over  the  "page 
printer,"  or  news  ticker,  a  complicated  little 
electrically  driven  machine  somewhat  similar 
to  the  typewriter.  These  printers  are  found  in 
nearly  all  brokerage  offices,  bond  houses, 
banks,  etc.,  and  even  in  restaurants  or  saloons 
which  have  the  sort  of  patronage  to  warrant 
them.  All  are  worked  by  electrical  wires  con- 
nected with  a  single  central  operator.  Each 
machine  contains  a  roll  of  paper  about  six 
inches  wide  on  which  the  messages  are  printed 
out  with  what  seems  painful  slowness  to  the 
feverish  speculator.  As  each  line  is  finished 
the  machine  automatically  shoves  up  the  paper 
half  an  inch  and  begins  on  a  new  line. 
Though  very  ingenious  and  usually  reliable, 
they  are  subject  to  peculiar  diseases  of  their 
«wn,  so  that  the  cry  "ticker  out"  often  goes  up 
just  at  the  most  exciting  moment. 

The  next  step  of  the  news  agency  is  to  set 
up  and  print  the  news  items  in  a  more  elabor- 
form  of  the  "news  slips,"  or  sheets  of  paper 


152  THE  MACHINERY 

about  the  size  of  the  ordinary  book.  These 
slips  are  delivered  to  subscribers  in  bunches 
by  boys  about  every  half  hour.  By  the  end 
of  the  day  the  amount  of  reading  matter  sent 
out  in  this  way  is  equal  to  that  contained  in 
the  average  newspaper.'  It  is  very  compre- 
hensive and  contains  many  items  of  general  in- 
terest not  directly  connected  with  the  markets. 

By  these  means  that  part  of  the  public  which 
is  interested  is  kept  constantly  informed  of  the 
development  of  events  and  thousands  of  more 
or  less  acute  minds  are  continually  digesting 
the  miscellaneous  mass  and  transmitting  it 
into  orders  to  buy  or  sell  this  or  that  security 
or  commodity. 

Since  the  first  readers  of  all  this  news  are  for 
the  most  part  speculators,  they  are  most  in- 
terested, not  in  the  final  effect  of  the  develop- 
ments recorded,  but  in  what  other  speculators 
will  think  and  do — for  that  will  control  the 
immediate  movements  of  prices.  It  is  to  this 
problem  that  they  apply  their  reasoning 
powers  and  the  results  are  sometimes  almost 
ludicrous. 

For  example,  the  market  has  a  quick  break. 
Speculators  rush  to  the  page  printers  to  see 


OF  WALL  STREET  153 

what  caused  the  decline.  After  a  few  minutes 
the  news  comes  out  on  the  printers.  Then  the 
mental  acrobatics  begin.  Some  are  alarmed 
by  the  news  and  sell  some  of  their  stocks. 
Another  reasons: 

"Ah !  They  have  sold  the  market  down  on 
this  news  and  have  all  got  short.  When  they 
start  to  cover,  prices  will  rally.  Buy  a  hun- 
dred Steel !" 

Still  others  may  say,  "This  selling  is  genuine 
liquidation.  Room  traders  have  bought  on  the 
break,  expecting  a  rally.  They  are  all  long 
and  when  they  try  to  close  out  they  will  find  a 
poor  market  on  which  to  sell.  The  real  de- 
cline hasn't  started  yet." 

There  is  probably  no  place  in  the  world 
where  so  much  topsy-turvy  reasoning  can  be 
observed  as  in  the  customers'  room  of  a  specu- 
lative brokerage  house. 

But  the  operations  of  these  day-to-day  specu- 
lators have  but  little  if  any  permanent  effect 
on  prices.  The  broader  movements  of  the 
market  are  made  by  that  class  which  is  some- 
times called  "speculative  investors,"  who  act 
more  deliberately  and  form  their  opinions  upon 
a  careful  study  of  the  whole  situation.  Any 


154  THE  MACHINERY 

one  investor  is  likely  to  be  frequently  mis- 
taken but  the  combined  judgment  of  all  rarely 
goes  far  astray.  Hence  the  level  of  prices,  as 
a  rule,  pretty  closely  represents  the  balance  of 
chances  in  regard  to  the  various  uncertainties 
which  are  at  any  moment  overhanging  the 
market. 

Sending  Out  Quotations 

As  the  thousands  of  orders  which  spring 
directly  or  indirectly  from  the  accumulation  of 
news  flow  into  the  exchange,  their  effect  is  re- 
corded in  purchases  and  sales  and  in  a  few 
minutes  the  return  flow  of  the  quotations  fol- 
lows. The  trading  at  the  various  posts  on  the 
Stock  Exchange  is  constantly  watched  by  re- 
porters who  record  the  quantities  and  prices  of 
the  transactions  and  forward  them  by  mes- 
sengers to  the  telegraph  operators  representing 
the  two  stock  ticker  companies,  who  have  sta- 
tions in  the  exchange. 

One  of  the  ticker  companies  serves  Stock 
Exchange  members  only,  and  the  other  serves 
any  subscribers  located  where  they  can  be 
reached  by  its  wires — with  the  proviso  that 
every  subscriber  must  be  endorsed  by  the  Stock 
Exchange  Committee  having  charge  of  the 
matter  before  a  ticker  can  be  installed  in  his 


OF  WALL  STREET  155 

office.  This  is  for  the  purpose  of  preventing 
the  use  of  the  quotations  by  bucketshops. 
There  is  no  difference  of  importance  in  the  ser- 
vice furnished  by  the  two  companies. 

The  stock  tickers,  like  the  page  printers,  are 
electricallv  connected  with  a  central  operator. 
Each  ticker  emits  a  narrow  ribbon  of  paper 
bearing  abbreviations  representing  the  various 
stocks  followed  by  the  amount  of  each  sale  and 
the  price.  For  example,  "A.  300.  99^"  signi- 
fies that  300  shares  of  Atchison  common  have 
been  sold  at  99^4,  and  so  on. 

In  addition  to  the  two  systems  of  tickers 
which  carry  quotations  from  the  New  York 
Stock  Exchange  there  are  tickers  for  the  Con- 
solidated Stock  Exchange,  for  cotton,  for 
coffee,  for  grain  and  provisions  (from  the 
Chicago  Board  of  Trade  and  also  from  the 
New  York  Produce  Exchange),  for  unlisted 
securities  and  for  bonds.  A  score  of  cities  out- 
side New  York  have  ticker  services  of  their 
own. 

In  quiet  markets  the  ticker  often  remains 
motionless  for  minutes  at  a  time,  but  in  busy 
times  it  has  hard  work  to  keep  up  with  the 
market.  After  choking  and  sputtering  at  its 
best  it  frequently  falls  behind  five,  ten  or  more 
minutes.  In  a  wild  market  this  is  decidedly 


156  THE  MACHINERY 

troublesome,  for  the  operator  who  places  his 
order  to  buy  when  his  stock  is  selling  at  90 
according  to  the  ticker  may  find  that  it  was 
at  that  moment  really  selling  at  93  on  the  floor. 
No  complete  remedy  for  this  difficulty  is  in 
sight,  for  no  mechanical  device  could  keep  up 
with  the  lightning  fluctuations  that  some- 
times occur  in  excited  markets. 

For  the  convenience  of  customers,  brokers 
have  the  prices  as  they  come  out  on  the  tickers 
posted  on  a  blackboard.  Formerly  a  few 
brokers  attempted  to  post  the  amount  of  each 
sale  also,  but  with  the  bigger  markets  of  re- 
cent years  it  is  doubtful  if  that  is  now  done 
anywhere. 

Many  facetious  nicknames  are  given  by  cus- 
tomers of  brokerage  houses  to  the  different 
stocks,  and  these  are  often  derived  from  the 
abbreviation  used  for  the  stock.  Missouri 
Pacific  is  almost  invariably  known  as  "Mop," 
U.  S.  Steel  sinking  fund  bonds  are  often  called 
"Sinkers,"  etc.  During  the  sensational  ad- 
vance in  Crucible  Steel  in  1915  it  was  called 
in  one  office  "Cruci-Bull,"  but  in  the  decline 
of  the  next  spring  this  was  changed  to  "Cru- 
cify." Almost  every  broker's  office  in  busy 
times  contains  some  wit  whose  chief  object 


OF  WALL  STREET  157 

in  life  seems  to  be  to  entertain  himself  and 
the  other  customers. 

Many  watches  in  the  Street  are  set  by  the 
stock  ticker.  Stock  certificates  must  be  de- 
livered by  2:15  p.  m.  and  this  rule  is  very 
strictly  enforced.  A  little  before  2:15  the  tick- 
er prints  "Time"  and  after  a  series  of  prelim- 
inary dots  prints  2:15  p.  m.  at  the  exact 
second. 

London  Methods 

The  Wall  Street  news  and  quotation  service 
is  superior  to  any  other  in  the  world  in  the 
promptness  and  completeness  of  its  operation. 
The  London  stock  tickers  do  not  attempt  to 
print  the  price  of  each  sale  nor  the  quantity 
sold.  They  merely  give  at  intervals  the  "bid 
and  asked"  quotations  on  each  stock.  The 
American  stock  trader  in  London  feels  as 
though  he  had  no  information  about  the  mar- 
ket worth  mentioning  with  only  these  meager 
figures  to  go  upon. 

Moreover,  London  quotations  for  American 
stocks  are  in  dollars  at  the  fixed  rate  of  $5  to 
the  pound  sterling,  and  this  has  to  be  corrected 
by  the  current  rate  of  exchange  before  the 
American  visitor  knows  how  his  stock  is  sell- 
ing in  New  York. 


158  THE  MACHINERY 

The  New  York  page  printers  and  news  slips 
give  the  London  quotations  for  the  principal 
American  stocks  each  morning,  quoting  both 
the  London  figure  and  the  New  York  equiva- 
lent at  the  current  rate  of  exchange. 

Although  the  London  Stock  Exchange 
nominally  closes  at  3  p.  m.,  which  is  equivalent 
to  10  a.  m.  at  New  York,  the  hour  when  the 
New  York  exchange  opens,  trading  in  Ameri- 
cans is  usually  continued  in  London  until  4  and 
in  active  markets  it  may  be  kept  up  on  the  curb 
there  until  8,  when  the  New  York  exchange 
closes.  New  York,  however,  has  to  rise  early 
to  trade  at  the  London  opening.  Brokers  and 
their  most  enthusiastic  customers  sometimes 
make  the  sacrifice  on  the  morning  after  some 
very  important  event,  such  as  the  Presidential 
election  of  1896. 

The  London  2  p.  m.  quotations  are  posted 
in  New  York  soon  after  9  a.  m.,  so  the  cus- 
tomer finds  them  there  when  he  arrives  at  the 
broker's  office.  Formerly  they  had  consider- 
able influence  on  the  opening  at  New  York,  but 
with  the  growth  of  the  New  York  market  and 
the  great  extension  in  the  number  of  securi- 
ties dealt  in,  London  no  longer  has  any  great 
significance  for  us  in  this  particular. 


OF  WALL  STREET  159 

Arbitrage  dealers  watch  London  closely,  but 
they  get  their  own  quotations  by  cable.  Arbi- 
trage means  buying  in  one  place  and  selling 
in  another  in  order  to  take  advantage  of  a  dif- 
ference in  prices.  There  were  formerly  some 
arbitrage  operations  in  stocks  between  Ameri- 
can cities,  and  they  still  take  place  between 
Toronto  and  the  New  York  Curb ;  but  the  term 
is  almost  confined  to  operations  between  New 
York  and  London,  so  far  as  stocks  are  con- 
cerned. In  grain,  arbitrage  is  constant  be- 
tween New  York  and  Chicago,  Chicago  and 
Minneapolis,  Chicago  and  St.  Louis,  etc.,  and 
it  is  frequent  in  cotton  between  New  York  and 
New  Orleans.  | 

The  Wall  Street  ticker  and  news  service  has 
come  to  stand  for  "gambling"  in  the  minds  of 
many  people,  and  there  can  be  no  doubt  that 
it  does  tend  to  encourage  operations  in  stocks, 
grain  and  cotton  which  are  gambling  in  the 
sense  that  the  would-be  speculator  is  taking  a 
chance  on  something  he  knows  little  about. 
As  usual  in  such  matters,  a  certain  class  of 
short-sighted  reformers  think  the  remedy  lies 
in  taking  an  ax  and  breaking  up  the  tickers. 

But  the  whole  question  goes  deep  into  our 
economic  and  business  system.  In  fact,  it 


160  THE  MACHINERY 

reaches  back  to  the  very  foundation  of  our 
Government  itself.  If  we  still  believe  it  to  be  a 
self-evident  truth  that  the  right  to  life,  liberty 
and  the  pursuit  of  happiness  is  really  "in- 
alienable," we  can  hardly  forbid  our  citizens 
to  operate  or  read  tickers,  or  to  buy  and  sell 
any  legitimate  article  that  they  want  to  buy 
and  sell. 

The  legal  principle  that  certain  acts  may  be 
prohibited  as  "contrary  to  public  policy"  has 
been  mightily  stretched  in  recent  years,  but  it 
hardly  covers  establishing  guardianship  over 
persons,  otherwise  legally  competent,  who  can- 
not tell  which  way  the  market  is  going. 

Our  economic  system  is  haphazard  enough 
and  the  improvement  of  it  is  a  consummation 
most  devoutly  to  be  wished,  but  that  is  not  to 
be  safely  accomplished  by  the  light-hearted  de- 
struction of  methods  developed  by  many  years 
of  experience  to  meet  conditions  as  they  now 
exist.  Until  we  can  plan  something  better  to 
take  the  place  of  the  ticker  and  all  it  repre- 
sents, we  must  perforce  let  it  continue  to  tick. 


CHAPTER  XIV 

Theory  of  Speculation — Speculative 
Terms 

rERE  have  been  numerous  theories  of 
speculation,  some  called  "scientific"  and 
some  not  dignified  by  that  term.     The 
central  idea  of  nearly  all  these  theories  is  that 
the  market  always  represents  a  sort  of  contest 
between  investors,  of  whom  the  most  influen- 
tial are  large  capitalists,  and  closely  connected 
with  the  great  banking  interests,  and  specula- 
tors,  including  the   pools,   the   big  individual 
plungers   and   the  public. 

It  must  be  borne  in  mind  that  in  the  stock 
market  it  is  dollars  that  count,  not  individuals ; 
that  is,  one  man  with  $1,000,000  to  use  in  the 
market  has  just  as  much  effect  on  prices  as 
1,000  men  with  $1,000  each.  Hence  a  few  very 
large  capitalists  may  easily  over-balance,  under 
ordinary  conditions,  all  that  part  of  the  specu- 
lative public,  which  is  operating  in  the  market 
at  the  moment.  Moreover,  $1,000  used  as  a 
ten-point  margin  has  ten  times  as  much  effect 
161 


162  THE  MACHINERY 

as  $1,000  which  is  used  to  pay  in  full  for  a 
stock  selling  at  $100. 

Hence,  small  investors,  even  though  they 
may  be  very  numerous,  do  not  usually  have 
much  influence  of  the  immediate  movements 
of  prices.  The  main  contest  is  between  the  big 
investors — who  might  as  well  be  called  specu- 
lators, except  that  they  can  always  command 
money  or  credit  enough  to  pay  for  their  stocks 
in  full  if  necessary — and  the  other  class  of 
speculators,  who  will  take  a  loss  if  the  market 
goes  against  them  far  enough. 

So  the  market  goes  through  a  series  of 
"cycles,"  or  "minor  swings,"  in  which  the 
heavyweight  interests,  which  are  at  the  time 
more  or  less  in  control  of  prices,  buy,  during 
.and  after  a  decline,  from  the  lighter  speculators 
who  can  be  scared  into  selling,  and  sell  at  a 
profit,  during  and  after  an  advance,  to  the  same 
or  new  lightweight  speculators,  who  become 
enthusiastic  enough  to  buy. 

These  minor  swings  occur  within  and  sub- 
ordinate to  the  broad  movements  of  prices, 
which  are  based  on  investment  values.  That 
is,  when  the  investment  value  of  stocks  is  in- 
creasing, the  upward  "leg"  of  the  minor  swing 
will  be  longer  than  the  downward  leg,  and 


OF  WALL  STREET  163 

when  investment  values  are  falling  the  reverse 
will  be  true. 

In  this  way  the  "technical  situation  is  cre- 
ated. The  technical  situation  is  strong  when 
most  of  the  floating  supply  of  stocks — or  of  a 
stock — is  held  by  people  who  will  not  sell  on 
declines,  and  it  is  weak  when  a  large  part  of 
the  floating  supply  is  in  "weak  hands,"  or  in 
the  hands  of  those  who  will  sell  on  a  decline — 
that  is  "the  public,"  as  the  term  is  used  in 
Wall  Street  parlance. 

Manipulation 

The  minor  swing,  which  may  last  anywhere 
from  a  week  to  several  months,  is  attributed  by 
most  people  to  manipulation — a  term  loosely 
used  to  mean  a  movement  of  prices  which  has 
no  connection  with  investment  values,  and  is 
brought  about  by  the  operations  of  controlling 
interests.  It  would  be  more  accurate  to  say 
that  the  minor  swing  is  nearly  always  accom- 
panied by  manipulation ;  for  the  real  cause  of 
the  swing  is  that  the  speculative  public  gen- 
erally buys  high  and  sells  low.  No  amount  of 
manipulation  could  compel  outside  speculators 
to  do  this.  They  do  it  because  they  are  "built 
that  way." 


164  THE  MACHINERY 

Manipulation,  however,  is  always  going  on, 
within  limits,  in  any  active  market.  When 
strong  interests  have  bought  up  the  floating 
supply  of  a  stock  which  they  believe  to  be  rela- 
tively low,  compared  with  its  value,  so  that 
very  little  stock  is  offered  near  current  prices, 
it  is  perfectly  natural  for  them  to  bid  up  the 
price  and  try  to  get  a  following.  After  they 
think  the  stock  has  advanced  as  far  as  it  is  en- 
titled to  go  or  farther  and  they  have  sold  out 
and  perhaps  gone  short  a  little,  it  is  quite  na- 
tural for  them  to  offer  the  price  down  to  see 
whether  the  holders  of  the  stock  will  sell  on 
declines.  That  is  manipulation.  It  may  be  car- 
ried on  over  a  range  of  one  point  or — in  a  few 
instances — a  hundred  points.  The  principle  is 
the  same. 

The  frequenter  of  speculative  brokerage 
houses  is  likely  to  hear  something  about  "wash 
sales"  and  "matched  orders."  Wash — or  ficti- 
tious— sales  are  a  thing  of  the  past,  not  now 
tolerated  by  any  legitimate  exchange,  though 
still  possible,  perhaps,  on  the  Curb.  Matched 
orders  are  prevented  so  far  as  possible,  but 
cannot  be  entirely  suppressed.  For  example, 
a  big  operator  gives  one  broker  an  order  to  sell 


OF  WALL  STREET  165 

S.  O.  S.  stock  in  specified  quantities  on  a  scale 
up  from  the  current  market;  then  he  dis- 
tributes among  other  brokers  orders  to  buy 
S.  O.  S.  The  result  is  an  appearance  of  great 
activity  in  S.  O.  S.  at  rising  prices,  although 
nothing  may  really  be  done  except  what  this 
one  operator  is  doing  with  himself.  His  object 
is  to  attract  other  buyers  to  S.  O.  S.  The 
brokers  who  handle  the  orders  may  suspect 
what  is  going  on,  but  they  have  no  way  of 
proving  it,  since  every  broker  must,  of  course, 
keep  secret  the  source  of  his  orders. 

Effect  of  Short  Interest 

The  manner  of  selling  stocks  short  has  been 
previously  explained.  "Shorts"  are  proverbi- 
ally timid.  Most  of  them  work  for  immediate 
profits  and  they  "run  to  cover"  when  prices 
turn  strong.  This  fact  is  a  great  help  to 
manipulators,  who  are  thus  in  many  cases  able 
to  get  the  market  higher  than  they  otherwise 
could,  by  bidding  up  the  price  and  "scaring  in 
the  shorts."  On  the  other  hand,  the  shorts 
often  support  prices  by  taking  their  profits 
after  a  sharp  decline. 

Stop  Orders 

Another  help  to  the  manipulator  is  the  "stop 
order,"  which  is  an  order  to  buy  at  a  certain 


166  THE  MACHINERY 

price  above  the  market  or  to  sell  at  a  price 
belozv  the  market.  This  sounds  silly  to  the 
novice,  but  the  purpose  is  to  prevent  a  trade 
from  running  into  a  bad  loss  or  to  keep  a 
trade  from  showing  any  loss  at  all  after  it 
has  shown  a  fair  profit.  When  stop  orders  are 
found  in  the  market,  any  manipulator  working 
on  the  bear  side  will  naturally  try  to  depress 
the  price  enough  to  reach  them.  When  his 
customer's  margin  is  in  danger  of  exhaustion, 
the  broker  has  to  put  in  stop  orders  in  order  to 
protect  himself  from  loss. 

Puts  and  Calls 

"Puts  and  Calls,"  or  "Privileges"  are  some- 
what similar  to  options  in  real  estate.  If  Read- 
ing is  selling  at  90,  Mr.  A.  pays  Mr.  B.  $100, 
for  example,  for  a  contract  to  take  100  Read- 
ing at  85  at  any  time  within  30  days.  This  is  a 
"put"— A  buys  the  put,  B  sells  it.  Then  if  A 
buys  Reading  at  87,  his  loss  is  strictly  limited 
to  two  points,  even  though  Reading  may  drop 
to  50,  for  he  has  a  market  at  85  at  any  time 
within  30  days.  On  the  other  side,  if  B  sold 
to  A  a  contract  to  sell  A  100  Reading  at  94  at 
any  time  within  30  days,  that  would  be  a  call. 
A  could  call  for  the  100  Reading  at  94  when- 


OF  WALL  STREET  167 

ever  he  wanted  it  within  the  time  limit.  So  if 
Reading  advanced  to  100,  A  would  have  six 
points  profit  without  having  invested  anything 
except  the  cost  of  the  call. 

These  privileges  also  look  absurd  to  the 
ordinary  observer,  because  A  pays  something 
for  the  privilege  of  buying  above  the  market  or 
selling  below  the  market.  Nevertheless,  there 
are  conditions  under  which  they  may  be  used 
very  profitably  by  an  expert. 

Buying  on  Instalments 

So  much  has  been  said  against  the  dangers  of 
margin  trading  that  a  substitute  has  been  de- 
vised and  has  become  very  popular;  namely, 
buying  stocks  on  instalments.  The  buyer 
enters  into  an  agreement  with  his  broker  to 
pay  for  his  purchase  of  stock,  part  down  and 
the  balance  monthly.  The  broker  buys  it  and 
carries  it  for  his  customer  until  paid  for  in 
full. 

So  far  as  New  York  Stock  Exchange  houses 
are  concerned,  this  is  really  a  purchase  on  mar- 
gin, for  the  broker  retains  the  right  to  close 
out  his  customer's  account  to  protect  himself 
if  necessary.  The  only  difference  is  that  the 


168  THE  MACHINERY 

broker  demands  a  first  payment  large  enough 
to  make  that  unpleasant  possibility  exceeding- 
ly improbable.  Houses  not  members  of  the 
Exchange,  however,  are  free  to  make  a  con- 
tract with  the  customer  not  to  sell  the  stock 
even  if  the  price  should  decline  below  the  point 
to  which  it  is  protected  by  the  first  payment, 
and  some  of  them  do  make  that  contract.  So 
far,  since  this  practice  came  into  vogue,  they 
have  not  been  called  upon  to  go  through  a 
panic  like  that  of  May,  1901,  or  November, 
1907.  It  is  perfectly  evident  that  the  strength 
of  the  contract  depends  entirely  on  the  strength 
of  the  brokerage  house  which  makes  it. 

It  will  be  noted  that  the  broker,  under  this 
instalment  contract,  does  not  have  to  deliver 
any  stock  for  months  to  come.  In  practice,  if 
he  is  not  a  member  of  the  Exchange,  he  can 
buy  the  stock  whenever  he  gets  ready.  This 
leaves  a  loop-hole  for  "bucketing" — that  is,  for 
not  buying  the  stock  at  all — but  since  the 
broker  agrees  not  to  sell  the  stock  so  long  as 
the  customer  keeps  up  his  instalment  pay- 
ments, there  is  little  inducement  to  bucket  the 
order.  A  more  serious  danger  is  that  a  fraudu- 
lent broker  might  silently  fade  away,  taking 
the  customer's  money  with  him. 


OF  WALL  STREET  169 

Discretionary  Accounts 

Legitimate  brokers  will  rarely  if  ever  accept 
discretionary  orders,  and  most  of  them  will  not 
accept  accounts  which  are  to  be  managed  by 
any  other  person,  except  the  principal.  This 
has  checked  the  business  of  handling  accounts 
for  other  people  which  was  formerly  carried  on 
to  a  limited  extent. 

The  timid  novice  is  sometimes  attracted  by 
the  idea  that  some  "expert"  can  handle  his 
account  better  than  he  can — especially  after 
he  has  bungled  matters  for  himself — but  those 
experts  who  can  really  do  it  are  usually  busy 
handling  their  own  accounts.  Finding  the  ex- 
ception is  like  looking  for  a  needle  in  a  hay- 
mow, and  much  more  costly. 

Market  Letters 

It  is  a  noticeable  fact  that  the  higher  the 
standing  of  a  broker  the  less  definite  and  em- 
phatic are  his  market  letters.  Combining  the 
business  of  the  broker  and  the  market  adviser 
is  decidedly  difficult.  The  broker  is  generally 
too  close  to  the  market  to  see  it  in  perspective. 

In  a  study  of  the  market  letters  of  twenty 
leading  brokerage  houses,  members  of  the  New 
York  Stock  Exchange,  I  found  that  over  a 


170  THE  MACHINERY 

period  of  several  months  they  averaged  a  cor- 
rect judgment  of  the  trend  of  the  market  con- 
siderably more  than  half  of  the  time.  That  is 
all  that  should  be  expected,  but  the  novice 
often  expects  more  and  is  disappointed. 


It  is  in  Wall  Street  that  economic  laws  find 
their  most  accurate  and  responsive  expression, 
and  it  has  been  the  experience  of  mankind  that 
tampering  with  economic  law  is  generally  cost- 
ly. Not  that  there  is  anything  sacred  about 
economic  law.  It  is  simply  the  best  method 
we  have  found  so  far  of  adjusting  the  business 
of  life  to  the  circumstances  under  which  it  has 
to  be  carried  on.  But  the  mere  fact  that  this 
process  of  adjustment  has  been  going  on  for 
centuries  makes  the  wisdom  of  sudden  or 
sweeping  changes  very  doubtful. 

The  Wall  Street  of  1950  will  undoubtedly 
be  as  far  ahead  of  to-day  as  to-day  is  ahead 
of  the  Wall  Street  of  the  Civil  War,  but  the 
change  must  come  slowly  and  naturally,  by 
well  considered  legislation  and  improvements 
in  banking  practice.  There  is  no  piece  of  the 
machinery  which  could  be  taken  out  and 
thrown  away,  because  each  piece  has  been 
fashioned  by  practice  to  meet  some  real  de- 
mand. 


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